Turkish growth outlook worsens as industrial output falls in June

Turkish industrial production fell for the tenth consecutive month in June, data showed, offering few signs of a pick-up in economic growth as domestic demand remains weak after last year’s currency crisis.

Industrial output began to decline after the currency slump which saw the lira lose nearly 30 per cent against the dollar and tipped the economy into recession in the last quarter of 2018 and first quarter of this year. Second quarter GDP figures will be released on Sept.2.

Industrial production on a calendar-adjusted basis contracted 3.9 per cent year-on-year in June, the Turkish Statistical Institute said, more than had been expected, and 3 per cent in the second quarter of 2019 as a whole.

In a Reuters poll, the calendar-adjusted industrial output figure had been forecast to fall 1.01 per cent year-on-year. Month-on-month, industrial production was down 3.7 per cent in June on a calendar and seasonally adjusted basis, the statistical institute said.

Industrial production, which remains low due to weak domestic demand, was dragged down further in June by a week-long public holiday at the end of the Muslim fasting month of Ramadan, said Hilmi Yavas, economist at Yatirim Finansman.

“Due to the strength of exports, industrial production was balanced to a certain extent in the first half of the year but we are seeing that foreign demand is not sufficient any more,” he said.

“There is already a significant slowdown in the industry sector abroad and views are increasing that this is slowly starting to affect us,” he added.

The manufacturing industry index fell 4.2 per cent month-on-month, while the mining and quarry sector index rose 2.4 per cent. The recent industrial production data has been volatile and economists tend to look at the wider trend by looking at the average of several months.

Turkey’s PMI index rose to an 11-month high in June due to a smaller slowdown in output and new orders, according to a business survey, which also showed manufacturing activity had contracted for the 15th month in a row.

The contraction in industrial production showed that growth in the second half of the year will be weak, Yavas said, adding that weak domestic demand could improve if banks’ loan volume increases.

“Things depends on whether the monetary transmission mechanism will work,” he said, adding that last month’s sharp interest rate reduction by the Central Bank and falling deposit interest rates support the idea that credit volume will grow.

Meanwhile the Turkey’s military pension fund OYAK has reached a provisional agreement to take over British Steel and could close the deal by the end of this year, potentially saving thousands of jobs.

The British government welcomed the deal, but the country’s largest union said ministers needed to work to protect the industry from potential damage from Brexit.

British Steel was put into compulsory liquidation on May 22 after Greybull Capital, which bought the firm for one pound from Tata Steel three years ago, failed to secure funding to continue its operations.

Closure of the company, which produces high-margin, long steel products used in construction and rail networks, would jeopardise 5,000 jobs in Scunthorpe, northern England, and a further 20,000 jobs in the supply chain.

Ataer Holding, an affiliate of Turkey’s military pension fund OYAK, said it would have the exclusive rights to carry out due diligence on British Steel and expects to finish this in October and the deal could be completed by year-end.

Ataer has nearly 50 per cent of Turkey’s biggest flat steel producer Erdemir.

Business Secretary Andrea Leadsom welcomed the deal as a step forward in securing British Steel’s future. She also said she was committed to “a modern and sustainable future for the industry”.

The Official Receiver said it was focused on finalising the sale over the coming weeks, during which time British Steel would trade and supply its customers as normal.

Union workers said the news was a relief. But leading union Unite said the government would have to help with high energy costs and to stave off risks associated with the government’s insistence on leaving the EU on Oct.31 with or without a deal. Unite said it was “essential that the government acts to prevent a disastrous no-deal Brexit which would lead to cheap steel being dumped in the UK market”.

EU steelmakers have been at odds with Turkey as they debate safeguards to protect themselves from the impact of US trade tariffs.

The tariffs have pushed surplus steel into Europe, especially from Turkey, which has overtaken China as the EU’s biggest foreign steel supplier.

Reuters