Turkey’s Manufacturing Purchasing Managers' Index (PMI) dropped further into the red falling from 48.9 in April to 46.4 in May – its lowest level since April 2009, IHS Markit said on June 1.

Any result below 50 means a contraction.

The PMI has been over the 50 no-change mark for 13 months in a row from March 2017 to March 2018, after spending the preceding 12 months below 50.

The May data pointed to a contraction in the economy many have feared following the currency volatility of recent weeks, which has continued for a second month. The manufacturing PMI showed its first negative result earlier this year in February and April.

The index was at 55.7 in January - the highest level recorded since March 2011 - before posting sharp declines in the following four months about when the current currency crisis began.

“The headline PMI figure signalled that the manufacturing sector struggled with more challenging business conditions in May. Slowdowns in output and new orders were evidence of this, with firms deciding to slowdown recruitment activities as a result. Meanwhile, an uptick in cost pressures led to a hike in output prices”, Gabriella Dickens, an economist at IHS Markit, said of the latest data.

Similar warning signs can be seen in the industrial production numbers. Turkey’s calendar-adjusted industrial production index gained 7.6% y/y in March, slowing for the third consecutive month, data from national statistics office TUIK showed on May 16. A 13.7% y/y rise was posted in December and annual growth rate has been declining since then.

Industrial production in Turkey was growing for an uninterrupted 18 months from October 2016 to March 2018. It peaked with the 14.7% gain seen last July due to the base effect caused by the failed coup attempt in July 2016.

Average annual industrial production growth quickened to 8.9% in 2017 from 3.4% in 2016, according to TUIK’s revised series of data. The previous data set pointed to average annual industrial production growth of 6.3% in 2017 and 1.8% in 2016.

Fears that Turkey’s economy is overheating intensified on March 29 as fourth quarter GDP growth for last year came in at 7.3% y/y with the full-year 2017 expansion given as 7.4% after 3Q GDP was revised up 0.2pp to 11.3%.

Turkey’s manufacturing boom has been founded on the government's TRY250bn (€46bn) credit guarantee fund (CGF) that provided a backstop for bank loans to businesses and encouraged a credit binge. Following the failed coup in July 2016 and the brake it put on economic growth, Turkey boosted the economy by upping spending across the board, hiking wages, pouring capital into investments and guaranteeing loans with the CGF.

The Turkish government recently announced a fresh stimulation package for 2018 in the build-up for the June 24 snap elections. However, the latest stimulation package has not proven effective yet.

Capital Economics commented in its May 25 note on Turkey that it looked like Turkish President Recep Tayyip Erdogan had “taken the hint” where the need for interest rate hikes was concerned but, it cautioned, an abrupt slowdown could be ahead for the country.

 “The latest activity data provide signs that economic growth is starting to slow. Admittedly, our GDP Tracker points to growth remaining strong at around 9% y/y in Q1. But the manufacturing PMI fell to a 15-month low in April, before the latest financial market turmoil. And past experience suggests that the sharp tightening of financial conditions in recent weeks is likely to precipitate an abrupt slowdown,” the consultant said in a note.