Turkish Economy: April IP
Getting ready for more investments in the private sector.
Industrial Production increased by 2,3% MoM considerably better than market expectations of a flat reading (seasonally and working day adjusted). When adjusted for working days the index rose by 6,7% YoY.
- Surprise arose by the significant increase in the production of capital (24,7% YoY) and durable (16,2% YoY) goods (cover figure).
- This reflects the strength of domestic economic activity.
- External demand sensitive intermediate good production was pretty flat (-0,2% MoM, +2,2% YoY).
- This year a relatively fast paced Ramadan is expected from an economic perspective.
- Anyhow today’s strong start to second quarter cushions all Ramadan related probable slow down in advance.
- Risks are running to the upside regarding GDP growth.
CapEx Main Cause of Surprise
Industrial Production indices usually poses a very volatile nature. Therefore strong gains are usually tracked by minor corrections. After surging 1,4% in first quarter we were expecting a slow start to the second quarter.
Especially following the worse than expected decline in German factory orders yesterday (-2,1%).
However low inventory levels combined with high running capacity utilization rate pushes producers for extra production. Tax incentives on domestic appliances and delayed investment plans seem to be boosting production levels. Capacity utilization can be considered as a «necessary» condition for investments. With the referendum behind, increasing confidence indices pose as the «sufficient» condition. Probably starting with second quarter private investments will contribute positively to GDP growth. Accordingly capital goods production increased by 24,7% and durable goods production rose by 16,2% YoY (Figure 1).
Ramadan Effect and Growth
Yesterday German factory orders declined by 2,1%. We tend to co-relate Turkish industrial production to German factory orders. Therefore we were looking for a low figure in the month of April. In fact external demand sensitive intermediate goods production fared quite stable. The index was down by 0,2% MoM and up by 2,2% YoY.
Due to its seasonal pattern the month of Ramadan was posing a threat for the second quarter outlook. Because a weak figure in April could create a burden on the index combined with a probable Ramadan slow-down. This year business conditions are expected to keep relatively lively in the month of Ramadan. Probably manufacturers and businesses will be trying to meet deferred demand. Factoring in today’s strong start to the second quarter all Ramadan related risks are cushioned in advance. We may see further upward revisions in the market regarding their GDP growth expectations (Figure 2).