Turkey’s manufacturing sector took a sharp step backward at the close of the first half as the compounding fallout from the war in the Middle East severely disrupted both domestic demand and international supply chains, the latest data released by the Istanbul Chamber of Industry and S&P Global showed on June 1.

The headline Turkey Manufacturing Purchasing Managers’ Index (PMI) plummeted to 47.1 in June, down from 49.8 in May.

The reading, which falls well below the 50.0 threshold that separates expansion from contraction, marks the 27th consecutive month of softening business conditions for Turkish factory floors. The abrupt decline erased a fleeting moment of stability observed in May, signaling deep-seated structural friction as the regional conflict drags on.

War chokes demand and logistics

The survey painted a grim picture of a sector caught between escalating geopolitical volatility and fragile market confidence. While Turkish production had managed a fractional rise in May, June saw a solid and renewed moderation in output.

A sharp pullback in new orders drove the downturn with the slump spreading across the export markets. New export business, which had expanded briefly in May, bucked its upward trend and returned to contractionary territory.

Factory owners explicitly blamed market uncertainty generated by the ongoing Middle East conflict alongside high baseline prices for the sudden evaporation of client orders.

Logistical headwinds also worsened. The war continued to compromise critical transit routes, causing vendor performance to deteriorate. Suppliers’ delivery times lengthened yet again in June though the extension of lead times was the least pronounced since February.

Marginal relief on price front

If there was a silver lining for the central bank in Ankara, it came from an incremental cooling of hyper-inflationary pressures. Both input costs and factory-gate prices rose at their slowest rates since late last year.

Input price inflation eased from April's recent peak to its lowest level since November. However, S&P Global noted that expenses still rose "sharply" in absolute terms, heavily driven by war-induced spikes in the cost of oil and vital raw materials.

Mirroring this trend, output charge inflation softened to its weakest rate in the year-to-date, suggesting manufacturers are losing the leverage to pass higher costs onto cash-strapped customers.

Employment and inventories cut back

Faced with a toxic cocktail of diminishing order books and stubborn raw material costs, manufacturers moved rapidly to protect margins by trimming capacity. Staffing levels were scaled back for the 19th consecutive month.

Companies reported that the workforce reduction was a mix of natural employee resignations and targeted efforts to align payrolls with lower production requirements.

Inventories of both raw purchases and finished goods were aggressively depleted in June. Manufacturers showed little appetite for holding stock against a backdrop of heavily muted demand.

"After showing signs of positivity in May, the Turkish manufacturing sector took a step back in June," said Andrew Harker, economic director at S&P Global Market Intelligence.

"Anecdotal evidence from the survey indicated that the war in the Middle East continued to be the principal cause of the challenges facing firms, and so some more positive news related to the conflict in recent weeks will hopefully help to improve business conditions in the months ahead," he added.