Turkey: July manufacturing PMI 46.9

According to the data announced by the Istanbul Chamber of Industry (ISO) and S&P Global; Manufacturing PMI fell to 46.9 from 48.1 in July. The latest data released pointed to a slowing manufacturing sector, staying below the threshold for the fifth month in a row. While the lowest index value was recorded after May 2020, the sharpest decline of the post-Covid-19 period occurred.

If we look at the details of the PMI data; insufficient demand seems to have led to a slowdown in production and new orders. Product price pressures caused by market uncertainties and the increase in input costs also led to difficulties in the general sector activity in the inflationary environment. In the case of input costs, the main factor continues to be the weakening of the lira. The factor to be evaluated positively here is that the final product price inflation recorded the slightest acceleration in recent months. Employment growth, on the other hand, seems to have been limited. The effects of wage hikes and the decrease in production may negatively affect employment and put pressure on domestic demand through this channel. Due to the difficulties experienced by suppliers in sourcing materials and global logistics problems, supplier delivery times continued to increase. Although disruptions in supply chains were the most pronounced in the last three months, they were much more moderate compared to the beginning of the year.

While the incoming data shows that there is a very sharp decline, it confirms that the downward trend in the industry continues, becoming more evident. We see that companies are leaning more towards stock management instead of making new investments. While the decrease in orders reduces production, companies prefer to melt their existing stocks more. At the same time, there is a structure in which loans are needed to make new investments. The problem of access to credit and the increase in its cost lead companies to short-term stock and cash flow management instead of medium and long-term investment and capacity increase perspective. In the short-term perspective, the demand cycle has become more evident. The fact that stocks remain high due to insufficient demand causes the risk that the industrialist may put more brakes on production in the coming months.

As a result; In terms of the slowdown image reflected in the inventory management and PMI sub-items, the data shows a sharp slowdown. The need for investment seems to have decreased as the medium and long-term view is taken into the background due to market uncertainty. We view the demand outlook as downwards in terms of both domestic and external demand. Due to the recession in Europe, the world and the main countries, the slowdown in foreign demand will be more evident. When the partial and periodic effects from tourism come to an end, positive items on the general economic trend and manufacturing-service sector rotation will also reduce their weight.

While the deceleration in general demand conditions explains the current situation, it also indicates that a slowdown may come from this channel in the future. In these slowdown indicators, the demand indicators of the economy, electricity consumption in the industry, certain frequency indicators announced by the OECD can be observed. We highlight the downside risks in the growth outlook in the base scenario, especially as of the 3Q22 period. In the positive scenario, there may be a geographical demand shift for Turkey due to the war with Russia and Ukraine, and proximity to Eastern Europe may bring an advantage in supply alternatives. However, if the industry does not make a perspective change that will change the outlook on investment, production and consumption, the slowdown effect on the economy will outweigh.

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