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Turkey: Capacity utilization in production increases, while real sector confidence declines

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In the December real sector confidence index data announced by the Central Bank, we observe that the course slowing down below the strong 3Q21 average, but at higher levels compared to the pre-pandemic period, continues. While RSCI decreased by 2.3 points to 106.1 in December; The seasonally adjusted RSCI, on the other hand, decreased by 1.9 points to 110.1.

 

In this period, the manufacturing industry capacity utilization rate increased by 0.6 points to 78.7%; The seasonally adjusted CUR, on the other hand, was 78.4%.

 

When the diffusion indices of the survey questions that make up the index are analyzed, it is seen that the export order amount in the next three months, the total employment in the next three months, the evaluations regarding the current product stock and production, and the volume in the next three months have an upward effect on the index. Evaluations regarding the general trend, total order amount in the last three months, fixed capital investment expenditures and current total order amount affected the index downwards.

 

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Incoming data reflect signs of partial slowdown in 4Q21. In this context, the loss of momentum, especially in fixed capital investments and due to the shortage of goods in the domestic market, will have a limiting effect on the periodic growth momentum. In terms of the trend in headlines and adjusted figures, and the industry average in terms of 4Q21, this confirms our opinion. On the other hand, the positive contribution in exports and goods inventories restrains the downward momentum. Therefore, we do not think that there will be an opposite trend regarding our double-digit growth expectation. Against this; It is clear that the market started to have difficulties in the axis of the generalization of inflationary effects, the compelling effects of the ongoing depreciation of TRY in the period until December, the rise in bond interests and CDS risk premiums, and the unbalanced portfolio and capital movements. As a matter of fact, a decreasing trend is felt in industrial orders and inventory replenishment times and costs are increasing. Inflation is on the rise due to the general spillover effect of the aforementioned conditions, and the expectation shows that annual inflation will accelerate further with the high periodic increases in the following months.

 

At this point, we attach importance to price stability in terms of market stabilization and normalization of activity. As it is known, despite the rate cuts in the last few months, financial conditions did not ease enough to open the market. Because price instability and the movement in risk indicators in this period caused real financing conditions to move in different directions. In this case, while bond rates rose, banks’ loan rates remained high. Since the current range of commercial loans still points to ranges of 25-30%, it cannot have an easing financing effect on the real economy. General fiscal policies, on the other hand, will follow an expansionary trend within the framework of the government’s new economy perspective. We will look at the degree of impact of the set of economic measures, especially the exchange-protected deposit instrument, which was introduced as a precaution against the depreciation of the lira, on the exchange rates and the price stability phenomenon. We think that giving forward exchange rates to exporter and importer companies in order to facilitate price determination in trade will ease the uncertainties arising from the use of the latest exchange rate.

 

In the short term, if the recent price increases due to the decline in exchange rates are normalized, we may see the spending effects of the slightly higher wage increases in 3 months. However, the high course and instability of inflation may still put pressure on private consumption. On the basis of the tightness in the domestic market and the slowdown on the indicated values, the weakness in the supply of goods as well as the declining consumption ability are also effective. The size of the inflation gap felt by wage increases reduces the ability to make autonomous consumption and, accordingly, to demand goods and services.

 

In terms of foreign demand, we have to monitor the increasing contribution of exports throughout the year, as well as the impact of the increasing Omicron spread and restrictions in the Euro Zone. Especially within the framework of the effects of PMI data, the spread of the virus may be reflected in the manufacturing industry trends through restrictions. In terms of its impact on export orders, economic growth in the Eurozone is significant. After the normalization, domestic industrial activity progressed strongly, but the recent global supply of goods and price pressures are compelling factors. The necessity of reducing macroeconomic uncertainties in terms of employment and production capacities draws attention. At the same time, it is important for companies to increase their profit margins due to the high real wage increase in terms of not experiencing a loss of employment or at least registered employment. In order to facilitate the financing of additional investments, the government wants loose policies to be followed, interest rates to be kept low and the credit channel to be accelerated.

 

When we evaluate all these conditions in general; With the expectation of 10.7% growth in double digits for the year 2021 in general, we expect the growth to slow down next year due to both the downside risk factors in the economy and the high base year. Our growth expectation for 2022 is 3.9% under current conditions.

 

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