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OVERVIEW The economy likely continued to contract in the second quarter. Private consumption should have been tepid, as suggested by de...

Turkish Economic Outlook Moderates




OVERVIEW
The economy likely continued to contract in the second quarter. Private consumption should have been tepid, as suggested by declining retail sales throughout the period, amid still-high inflation and a rising unemployment rate—which reached an over-decade high in May. Moreover, the industrial sector was subdued, as evidenced by falling industrial output in April–June. More positively, the current account deficit narrowed markedly year-on-year, although this was largely due to weak domestic demand. Turning to the third quarter, signs are scarcely more encouraging. In July, the manufacturing PMI was deep in contractionary territory, while vehicle sales plummeted as government tax incentives expired. That said, the Central Bank’s rate cut in July should be providing some impetus to activity, while tourist arrivals were up 17% year-on-year in the same month, supported by the weak lira.

REAL SECTOR
Industrial output declines further in June Turkish industrial production fell 3.9% year-on-year in June, down from May’s 1.3% fall. The drop in production was driven by faltering manufacturing output, while the electricity, gas and steam, and mining and quarrying sectors rose. Sequential data was also downbeat; industrial output fell 3.7% over the prior month in June on a seasonally- and calendar-adjusted basis, contrasting May’s 1.2% increase (previously reported: +1.3% quarter-on-quarter seasonally adjusted).

OUTLOOK
Sentiment among Turkish consumers improved slightly in August after dropping to a near-record low in July, with the consumer confidence index rising to 58.3 in August from 56.5. As a result, the index inched closer to the neutral 100-point mark, but remained deeply entrenched in pessimistic territory. August’s uptick was due to consumers’ less pessimistic assessment of the economic outlook and their financial situation. Moreover, households held Industrial Production | variation in % Note: Year-on-year and annual average variation of industrial production index in %. Source: Turkish Statistical Institute (TurkStat) and FocusEconomics calculations. -12 -6 0 6 12 18 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Year-on-year Annual average % Purchasing Managers’ Index Note: Istanbul Chamber of Industry (ICI) Purchasing Managers’ Index (PMI). A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: IHS Markit and ICI. 40 45 50 55 60 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Consumer Confidence Index Note: Consumer Confidence Index. Values above 100 indicate an optimistic outlook while values below 100 indicate a pessimistic outlook. Source: Turkish Statistical Institute (TurkStat). 40 60 80 100 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 FOCUSECONOMICS Turkey FocusEconomics Consensus Forecast | 90 September 2019 less negative expectations for the labor market in August and their probability of saving improved. FocusEconomics Consensus Forecast panelists see private consumption declining 3.4% in 2019, which is down 0.1 percentage points from last month’s forecast, before expanding 2.5% in 2020.