Turkish industrial production growth offers (short term) optimism

By bne IntelliNews May 8, 2012

Justin Vela in Istanbul -

Turkish industrial production registered a slightly better than expected 2.4% year-on-year growth in March, according to figures released by TurkStat. Analysts suggest the result is a signal that the economy could be rebalancing and the current account deficit narrowing, but many questions remain.

The market consensus was that Turkey would only see industrial production growth of around 2% growth in March, especially after hikes in energy prices earlier in the year. Hence this is good news in the short-term, especially for those increasingly concerned about Turkey's surging current account deficit.

"Developments to date point to flat to slightly positive GDP growth in the first quarter," writes Citi Bank. "We also think that the current account deficit is likely to narrow in the coming months on the back of continued decline in non-energy imports and relatively strong exports."

However, too many questions remain to become overly enthusiastic. The results of the recent elections in France and Greece will have a huge impact on Turkey, both politically and economically. Further Eurozone stagnation will first be felt in Turkey's export sector, which official estimates say grew an healthy 12.2% year-on-year in March, as the EU remains the country's main trading partner. A pick-up in economic activity is likely to also mean a less competitive lira, which will have a negative impact on exports.

Therefore, whilst the figures offer some optimism, the current global climate, coupled with the need for structural reform and adjustment of monetary policy, suggests continued longer term challenges. Long-standing issues hindering Turkish production include the over-reliance on white goods exports, under-utilization of agricultural potential and poor IT-skills, stress observers, who urge stronger steps from the government and central bank.

Whilst BGC Partners forecasts industrial production in the first quarter will come in at 2.5% year-on-year, they exhibit concern over the structure of that growth. Whilst the rise of domestic energy production is a positive to substitute imports - production and supply of electricity, gas, steam and air conditioning rose 7.9% in March - manufacturing could manage a gain of just 1.6%. Clothing, plastics, chemicals, and motor vehicles - goods Turkey should be exporting more of - performed weakly, the analysts point out.

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