Turkey’s industrial production started the new year with an upswing, as it fell by 7.3% YoY in both unadjusted and WD-adjusted terms, somewhat better than the -8.0% median market expectation, but registering a 1.0% MoM improvement following the five consecutive month of deceleration. Has it bottomed out?
Major sectors continues to register double digit contraction, while few sectors registers YoY growth
Mr. Serkan Gonencler, the chief economist for Seker Yatirim, provided the details of the annual data:
Major manufacturing sectors, which have a relatively higher share in the total index, continued to register high YoY contraction. Among those sectors, we especially note the other non-metallic minerals (-23%), base metals (-19%), machinery-equipment (-18%), motor vehicles (-12%), rubber and plastics (-12%), fabricated metals (-8%) and electrical equipment (-8%). Contraction in other non-metallic minerals is indicative of the tough period the construction sector has been experiencing. Meanwhile, contraction in the food sector, which has about a 12% weight, and the textile sector, which has about a 7% weight, eased somewhat to 3% and 5%, respectively.
In contrast, we may cite some sectors that have registered YoY positive growth, such as other transport equipment (38%), other manufacturing (27%), pharmaceuticals (16%), tobacco (7%) and furniture (1.5%).
Government expenditures, resilient external background aid rebound
Mr. Hilmi Yavas of Yatirim Finansman Securities expects a mild increase in real GDP in 2019, on the back of his analysis of IP trend analysis:
We believe, a steep rise in government expenditures (near 60% in January) was a key factor supporting quite a rapid stabilization. In addition, relatively resilient foreign demand was a mitigating factor during the downwards adjustment. It appears, continuation of government spending and fresh signs of credit growth would continue to support further sequential improvement in the rest of 1Q19.
Following 5.0% QoQ s.a. contraction in 4Q18, we might in fact see a quarterly expansion in IP. A rapid stabilization is of course supportive of cancelling downside risks to growth outlook. However, one must note secondary effects of rapid stabilization in IP, namely increasing budget expenditures.
For now, we keep our 1.5% FY19 GDP growth estimate unchanged, in contrast to a flurry of downward revisions from market participants & international organizations. An anticipation of blockbuster tourism sector this year, and relatively stable exports (despite more significant decline in global trade) are major contributors to our relatively resilient growth expectation.
It is demand, stupid
While a recovery in EU is certain to drive IP expansion, Turkey is a demand driven economy, with household consumption and private sector fixed investment making up roughly 70-75%of GDP. The government erroneously supports the supply side with cheap loans and investment incentives in its pre-election stimulus drive ignoring the plight of the demand side. With high inflation and slumping employment eating away at disposable income and reducing the appetite for long-term capex projects, a sustainable recovery in industrial production is not feasible. With Central Bank’s survey revealing 12 month inflation forecast at 15% and TL depreciation vs dollar at ca 12% it is difficult to foresee an important in the drivers of private demand. To exacerbate demand woes, the government is interfering with the free market, cracking down on companies and sectors turning in profits to tame inflation.