March IP: Industries healthy and steady.

Turkish Economy: March IP

Industries healthy and steady.

Industrial Production increased by 1,3% MoM slightly better than market expectations of 0,8% (seasonally and working day adjusted). When adjusted for working days the index rose by 2,8% YoY.

In quarterly terms the index rose by 1,4% QoQ (seasonally and working day adjusted).

Key Take-aways:

  • Displaying a more regular pattern with sequential ups and downs, IP index seems to be normalizing statistically, erasing all left-over effects from shocks occurred in July – August period in the magnitude of 3 to 4 standard deviations.
  • The index got synchronized with German factory orders as well, another reliable sign increasing predictability.
  • Manufacturing main driver of economic activity in Q1.
  • Durable goods production surged by 9,8% QoQ on the back of tax incentives by the government.

General Trend

Relatively better production levels in Germany and domestic demand boosting fiscal measures of the government seems to have kept industrial production on its trend
(Figure 1).

Although survey-based soft data indicates optimism in Europe, it did not really kicked into hard data yet. For instance, in Spain industrial production decreased in the first quarter. Spain posted back to back negative figures in February (-0,2%) and March (-0,4%). Simultaneously Italian industries fared weak posting an unexpected slump in January (-2,3%) that was hardly recovered in February (+1,0%) and market expectations are at 0,3% for the March data.

On the eve of presidential elections France was not that different. Industrial production decreased by 0,2% and 1,6% in January and February, respectively.

European Relation

However, German industries – the leading economy in Europe – posted strong gains in January and February by 2,4% and 0,8%, MoM respectively. That benefited Turkey’s manufacturers as opposed to the weakness of other European  economies denying further acceleration of German factory orders. Factory orders increased by 2,4% YoY in first quarter slowing down from 5,7% recorded in the previous quarter.

Turkish industrial base seems to be more sensitive to German related developments.  Turkish exports increased by an average of 10% YoY per month in the first quarter. Automotive exports reached all-time high with USD 7,1bn – Germany being the top market.

On the back of these developments industrial production recovered its sync with German factory orders in March. During last two months both indicators had opposing signs which was corrected in March as factory orders increased by 0,8% and industrial production by 1,3% (Figure 2).

Domestic Developments

The deficiency from ex-German European demand was filled by government’s domestic demand boosting fiscal measures. Tax allowance on certain domestic appliances helped durable goods production to improve. Durable goods production increased by 9,8% QoQ in the first quarter. Meanwhile sales have surged by 36% YoY (Figure 3).

Central bank’s recent survey points to higher rates of capacity utilization (78,8% in April). Last year manufacturers depleted their inventories which need to be replenished. SME oriented SAMEKS index rose to 55,8 in April while PMI index hovers about 52.  Manufacturers may prefer re-building their inventories going forward.

We’ll be watching these three developments:

1. Investment plans of the real sector during post-referendum period,
2. Inventory management of manufacturers, and
3. Manufacturing conditions in Europe following Macron’s election victory.