Despite the whopping 13.8% y-o-y real GDP contraction in Q109, I have stuck to my view that Turkey is among the best macro plays in emerging Europe. This strategic view has been formed out of three key premises: 1. The Turkish banking sector is among the most stable in Europe with among the highest growth potential over the long term. 2. The level of external leverage in Turkey is low relative to the rest of the region, which will sharply mitigate refinancing risks amid the credit crunch. 3. Turkey benefits from the only non-coalition majority government committed to market reforms in central and south-eastern Europe.

So that’s the broad view, but how is this playing out in the here and now? Well, industrial production in Turkey appears to be gaining momentum, with latest leading indicator data through to June reinforcing my view that the recession troughed in H109. Capacity utilisation in the manufacturing sector has sharply recovered, bouncing to 72.7 in June, from a record low 63.8 in January and February. I’ve always liked capacity utilisation as a leading indicator for the growth cycle, especially during recessions, so the marked improvement through Q209 bodes particularly well for the overall economy. Indeed, it is notable that the sharp decline in capacity utilisation to its record lows in December and January helped to underpin BMI’s out-of-consensus bearish outlook for the Turkish economy at the time. Having now pushed back above 70.0% though, the indicator is suggesting that the Turkish economy is entering into a tentative recovery.

Turkey - Capacity Utilisation and Real GDP Growth

This trend is reinforced by industrial output figures released on August 10. According to the latest data, the pace of the decline in industrial production moderated dramatically at the end of Q209, contracting by 9.7% y-o-y versus 17.4% in the previous month. Despite the still sharp contraction, it was notable that June’s figure was the best outturn since October, and marked the second consecutive month of improvement.

Turkey - Industrial Output, % y-o-y

Both capacity utilisation and industrial output are indicating that activity on the producer’s side is picking up momentum. Part of this has to do with the unwinding of a wide output gap which had developed as a result of far higher reductions in production and capacity (nearly 20%) as compared to the actual fall in demand. However, it also is reflective of early signals of a recovery in Turkey’s main trading partners in Western Europe.

Positively, the improvement in production has been reflected in the key composite leading indicator published by the Central Bank of the Republic of Turkey. In all three measures of the indicator, a sharp improvement has been recorded, especially through Q209.

Turkey - Composite Leading Indicator (From CBRT)

This has been mimicked by business confidence indicators, which show a trough in Q109, followed bay a bounce back to pre-crisis levels in Q209.

Turkey - Confidence Indices

Consumers To Lag Producers

While I am very encouraged by the improvement in production and confidence, it is as yet to early to suggest that Turkey will buck the regional trend and benefit from a ‘V-shaped’ recovery in 2010. Domestic consumption looks to be lagging behind producers by at least one quarter, with tentative recovery unlikely until Q309. Consumption is likely to remain weighed down through the short term by persistent weak domestic loan expansion, with credit continuing to show flat growth in real terms through to latest data for May. Lagged effects from rising unemployment will also continue to feed through to the third quarter and beyond, restricting potential domestic demand and by extension, aggregate economic growth.

Turkey - Deposit Banks Domestic Loans % y-o-y (Nominal)

Tags: capacity utilisation, CEE, Confidence, Economy, growth, Industrial Output, recession, Turkey
Posted in: Emerging Europe, General
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