May IP: Harmonic ups and downs akin to the chords of a classical tune

Turkish Economy: May IP

Harmonic ups and downs akin to the chords of a classical tune

Industrial Production decreased by 1,5% MoM more than market expectation of a 0,2% decrease (seasonally and working day adjusted). When adjusted for working days the index rose by 3,5% YoY.

Key Take-aways:

  • Despite the negative sign in today’s figures, industrial production continues its upwards accent (cover figure).
  • For highly volatile series such as industrial production up and downs are very common and usual. After a surprise and sound 2,2% increase in April the series corrected itself towards its long term average.
  • Vivid global economy supports domestic manufacturing, export oriented intermediary goods production rose by 1,1% MoM.
  • In the first quarter the index rose by an average of 1,4%, after today’s data at its current run-rate the index is still up by 1,9% compared to its first quarter average
  • We expect Ramadan effect will be limited this year and after today’s pull-back June data may fare better.

A Well Received Correction

Industrial Production indices usually poses a very volatile nature. Therefore strong gains are usually tracked by minor corrections. After surging 2,2% in April we were expecting a weak figure for May.
In fact we were surprised last month when production was announced to the upside even after surging 1,4% in first quarter - back-to-back strong gains are rare.

In the details of April data, a 12% MoM increase in capital goods production came totally as a surprise. Accordingly capital goods production fell in May by 9,4% MoM, correcting itself. However durable goods production came in a little weaker with a 5,3% MoM decrease. Tax allowance for durable goods will conclude by September. After boosting production by 16% during January – April period, it seems normal to act cautiously for durable goods producers and refraining from oversupplied inventories.

Export oriented intermediary goods production rose by 1,1% MoM in line with strong European data (Figure 1). Car production, main export item, rose by 3,3% MoM in May.

Global Consumer Demand

In G4 countries, higher employment suits consumers with a good budget. Lower gasoline prices provide better spending power for consumers, additionally. The strength of the consumers can be tracked in rising retail sales data (Figure 2). Even amid all Brexit dilemma UK retail sales fare in positive territory.

Strong European consumption accommodates Turkish producers ideally (Figure 3). Among them car manufacturers benefit the most. Automobile production and exports continue running at record levels.

Global Consumer Demand

Increasing demand needs to be met by higher manufacturing supply. Factories are running in full steam trying to meet the demand of consumers (Figure 4).

When the «reflation» theme started early last year on the back of rising Chinese PPI, producers benefited from higher margins. Pricing power provided the initial impetus for manufacturing revival that became visible through out the year. Now consumers are taking over securing a healthy outlook for manufacturing with higher demand (Figure 5).

Limited Ramadan Effect

This year climate conditions were ideal during Ramadan which coincided with the month of June. Longer fasting  hours were compensated by cooler weather keeping individual energy levels at optimum. So far survey based data reflects economic activity did not deteriorated, limiting Ramadan’s effect on production (Figure 6). Second quarter will probably be finished on a strong footing that may help carry the momentum into the third quarter.