Aug 01 2018

Turkish manufacturers signal more bad news for inflation

Turkish manufacturers reported output price inflation accelerating to the highest pace in more than a decade in July in a further sign that the country’s double-digit inflation rate continues to increase.

“Raw material prices rose as a result of the weak lira, causing input prices to increase at a marked pace,” the Istanbul Chamber of Industry and IHS Markit said in a monthly survey of manufacturers. “Consequently, output price inflation sharpened to a 12-year high.”

Consumer price inflation in Turkey surged to 15.4 percent in June, more than three times the average in major emerging markets, after the lira sank to record lows against the dollar. The currency has lost more than 20 percent of its value this year, pushing up prices, after the government stimulated economic growth with a series of measures ahead of elections on June 24. Producer price inflation has already accelerated to 23.7 percent in June, almost double the 12.1 percent reported for January.

Turkey inflation

The Turkish Statistical Institute is due to report official inflation data for July on Friday.

The IHS Markit survey also signaled that Turkey’s economic rebalancing, brought on by the lira’s decline and hikes to interest rates, may be losing pace. It showed business conditions deteriorating at a slower pace in July than the previous three months as export orders rose, prompting manufacturers to employ more people. Headline PMI was 49 in July, rising from 46.8 in June, the survey showed.

Turkey manufacturing

“Total new orders continued to weigh on the headline figure in July,” IHS Markit said. “Output also lost pace in response to demand conditions. However, both slowed down at a more moderate pace compared to the prior survey period.”

Turkey’s central bank said this week that a rebalancing of the economy may continue in the third quarter, though government fiscal policy was set to moderate a slowdown in domestic demand.

The central bank has raised interest rates by a total of 500 basis points this year to 17.75 percent. It surprised investors last month by keeping rates unchanged in response to higher inflation. Lack of central bank action has raised concerns that President Recep Tayyip Erdoğan’s government, which is calling for lower interest rates to support economic growth, is interfering in monetary policy.

The lira fell 0.3 percent to 4.926 per dollar at 11:06 a.m. in Istanbul, nearing a record low at 4.98.

The economy has grown an average of more than 8 percent in the nine months to March, the fastest pace in industrialised countries. Erdoğan has said he expects strong growth rates to continue.

Turkey is expected to tackle inflation by increasing manufacturing output, MUSIAD, a leading pro-government business group, said this week.