Turkey’s PMI weakens to lowest in over seven years in June

By bne IntelliNews July 1, 2016

Manufacturing business conditions in Turkey deteriorated sharply in June to the lowest level since April 2009, adding to signs the economy continued to ease in the second quarter, a survey compiled by Markit Economics and the Istanbul Chamber of Industry showed on July 1.

The headline Istanbul Chamber of Industry Turkey Manufacturing PMI is a composite single-figure indicator of manufacturing performance. It is derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases. Any figure greater than 50.0 indicates overall improvement of the sector.

The PMI fell to 47.4 from 49.4 in May, staying below the no-change mark of 50.0 for the fourth month running in June. The PMI was negatively influenced by four of its five components in June, the exception being suppliers’ delivery times. The average reading for the second quarter of 48.6 was the lowest for any quarter since the first quarter of 2009.

The market expected PMI to decline to 48.9 in June, Deniz Invest said on July 1 in an e-mailed report, adding that “we could see the gauge top the critical threshold of 50, thanks to improved real sector confidence”. However, it seems local confidence indicators, providing surprisingly good sentiment in the recent months, misled, according to Deniz Invest.

Trevor Balchin, Senior Economist at Markit, commented that the recent weakness seen in the PMI has been borne out by the latest official industrial output data. Turkish industrial output growth weakened to a nine-month low in April.

“I think a story for this year will be of gradually weakening domestic demand, building into the disinflation story, as the security/political concerns (impact on tourism) begin to weigh on sentiment,” Tim Ash at Nomura said in a note, commenting on the weak production data on June 8.

Ash also said on July 1 in an-emailed comment that the latest PMI reading was very bond friendly and supportive of his own long held view. Slowing growth should continue to be supportive for local rates (crashed lower already close to 300bps this year), and this will play into domestic deflation, and likely encouraging an already dovish central bank to do more, not less in terms of policy easing, according to Ash. Turkish lira, meanwhile, has been relatively well anchored in recent months despite the security/political risks, Ash also said.

The volume of new orders received by Turkish manufacturers declined for the fourth month in a row in June. Moreover, the rate of contraction accelerated from May’s fractional pace to the fastest since April 2009. Data signalled that orders from the domestic market fell at a sharper rate than new export orders. Nevertheless, new export business declined for the sixth month running.

In line with the trend shown for new orders, production declined for the fourth successive month and at the fastest rate since April 2009.

The deteriorating business climate was highlighted by a lack of pressure on manufacturing capacity in June, with backlogs falling at the fastest rate since July 2013. As a result, manufacturers stopped expanding workforces following a nine-month month period of modest job creation.

Weakness was also evident in survey indicators for purchasing. The volume of inputs bought by manufacturers declined for the fourth time in five months, and at the fastest rate since April 2009. Stocks of purchases contracted for the fifth month running.

Input prices paid by Turkish manufacturers rose further in June, linked to exchange rates. That said, the rate of inflation eased since May and was weaker than the long-run survey average. Output price inflation also eased since May, but remained strong in the context of historic survey data.

The Turkish economy grew by 4.8% y/y in the first quarter despite political uncertainties, renewed clashes in the country’s Kurdish region and geopolitical tensions. Still, growth weakened from 5.7% in the last quarter of 2015.

The government expects the Turkish economy to grow by 4.5% this year, while the World Bank’s latest GDP growth forecast for Turkey is 3.5%.

The latest PMI reading "reinforces our impression that growth weakened in Q2, following a strong Q1" analysts at Capital Economics said in a note.

Industrial Production by main Industrial Groups (April)    
(%) Calendar Adjusted Seasonally & Calendar Adjusted
  (y/y) (m/m)
Total Industry 0.7 -1.1
Intermediate Goods 1.5 -0.7
Durable Consumer Goods -3.0 -3.2
Non-durable Consumer Goods 4.3 0.0
Energy 2.9 -0.2
Capital Goods -5.8 -3.7
Source: tuik

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