Turkey’s Manufacturing Purchasing Managers' Index (PMI) recovered slightly from 46.8 in June to 49 in July, IHS Markit said on August 1.

Any result below 50 denotes a contraction.

“The headline figure suggested that challenging business conditions continued in the Turkish manufacturing sector during July, though the slowdown moderated. On a positive note, export orders and employment increased, partially offsetting slowdowns in total new orders and output. Inflationary pressures sharpened further with output price inflation rising to a 12-year high,” Gabriella Dickens, an economist at IHS Markit, said of the latest data.

It should be noted that the July PMI figures do not include the effects of the latest hikes in natural gas and electricity prices.

Turkey’s state-owned pipeline operator Botas announced on July 31 that it hiked the price of natural gas used for electricity production by 50% as of August 1 while it also put up the price of natural gas for residential use by 9%.

Botas last hiked natural gas prices in the final quarter of 2014 and during the following 44 months gave a 10% discount, in October 2016, despite an almost 100% increase in oil prices and 63% rise in the USD rate. The company cited these facts in defending its shock price rise decision in a written statement.

Also on July 31, Turkey’s energy market watchdog EPDK announced that it hiked electricity prices for industrial use by 14% and for residential use by 9% effective August 1.

Almost a third of Turkey’s total 293bn MW electricity production stemmed from natural gas power plants in 2017.

The latest increases in natural gas and electricity prices are expected to add 35-40bp to headline annual CPI inflation. Together with the indirect impact through producer prices, the impact on annual headline inflation could rise to as high as 100bp, Ibrahim Aksoy of HSBC Turkey told BloombergHT.

Aksoy expected annual CPI inflation to climb to 16.2% in July and to approach 17% in August.

Erdal Bahcivan, head of the Istanbul Chamber of Industry (ISO), described the price hikes as “an electric shock to Turkish industrialists”.

The PMI saw 46.4 in May, the lowest level recorded since April 2009, and then stayed on a limited recovery path across the following two months.

The PMI figure was posted at more than 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 June data indicates that a contraction in the economy took place for a fourth month in a row. The manufacturing PMI showed its first negative result earlier this year in April.

The index was at 55.7 in January - the highest level recorded since March 2011 - before sharply declining in the following four months during which the ongoing currency crisis took hold and accelerated.

“July’s PMI continued to suggest that a sharp slowdown lies in wait. The index is still well below a recent peak of 55.6 in February. And on past form, the latest PMI reading points to industrial production growth weakening from 6.4% y/y in May to around 2% y/y in the coming months. This corroborates with other data that suggest that economic conditions are deteriorating,” Liam Carson of Capital Economics said on August 1 in a research note.

Capital Economics expects a quarter or two of negative growth this year and it has put out 2018 GDP forecasts for Turkey well below the consensus at 3.5%.

Similar warning signs can be seen in the industrial production numbers. Turkey’s calendar-adjusted industrial production index gained 6.4% y/y in May, very slightly higher than the 6.3% y/y growth registered in April, data from national statistics office TUIK showed on July 17.

Turkey’s latest manufacturing boom was very much founded on the government's TRY250bn (€54.13bn) credit guarantee fund (CGF) used to backstop bank loans to businesses from late 2016. It was seen to encourage a credit binge. Following the failed coup and the brake it put on economic growth, Turkey boosted the economy by upping spending across the board, hiking wages, pouring capital into investments as well as guaranteeing loans with the CGF.

The government announced a fresh stimulation package for 2018 in the build-up to the June 24 snap elections. However, it has not yet shown any substantial impact.

Despite the expectations and the central bank’s stress on securing correction in fiscal policy, two unnamed officials told Reuters on July 27 that the government was considering further stimulus measures to tackle an expected slowdown in growth in coming quarters.

“Stimulus measures would simply exacerbate Turkey’s economic vulnerabilities and, combined with US sanctions, could ultimately tip the country into a full-blown crisis,” Jason Tuvey of Capital Economics said on July 31 in a research note.