Turkish Economy Hits Grim Milestones That Show Pandemic Toll

(Bloomberg) -- The costs of containing the coronavirus outbreak are starting to add up for Turkey, while keeping demand so weak that inflation remains bottled up despite months of declines in the currency.

A gauge of manufacturing last month had its sharpest drop since the global financial crisis, a consequence of the disruptions caused by Turkey’s measures to keep the pandemic in check. Exports and imports also plummeted in April, with consumer inflation reaching its slowest in five months.

• Manufacturing output and new orders had the biggest slowdowns since the Purchasing Managers’ Index survey began in 2005, according to a report Monday compiled by the Istanbul Chamber of Industry and IHS Markit
• The PMI gauge retreated to 33.4 in April, down from 48.1 the previous month and far below the threshold of 50 that separates growth from contraction
• Firms scaled back their staffing levels for the first time in four months, leading to the sharpest downturn in employment of the past 11 years
• Consumer prices rose an annual 10.9% in April, down from 11.9% the previous month; core inflation, which strips out the impact of volatile items such as food and energy, slowed for the first time in half a year, a sign that some of the underlying cost pressures are moderating
• Turkish exports slumped an annual 41% in April, while imports dropped 28%; economic confidence last month declined to the lowest level on record, according to data going back to 2007

Factories are reeling from Asia to the U.S., a sign the global economic recovery from the biggest crisis since the Great Depression will likely be long and uneven. Turkey has felt the whiplash across its roughly $750 billion economy, which is now on track for its second recession in two years only months after targeting growth of 5% in 2020.

While the restrictions imposed in Turkey were far less severe than in Italy and Spain, the government introduced some curbs far earlier than many European countries, announcing steps within the first few days of confirming its first coronavirus case on March 10.

President Recep Tayyip Erdogan will chair a cabinet meeting later Monday, where easing some restrictions will be on the agenda. Still, most of the limits are expected to remain in place until around Eid al-Fitr, a public holiday in late May that marks the end of the holy Islamic month of Ramadan.

Turkey is maintaining weekend curfews and a quarantine on the largest cities, bans older people and youth from going out, and is keeping schools and universities shut. All domestic and international flights are grounded except for those meant to evacuate Turks trapped abroad, while all sports games are suspended until there’s more clarity on the spread of the virus.

Oil Relief

As a net oil importer, Turkey is getting a measure of relief from the collapse in commodity prices, with the central bank last week lowering this year’s inflation forecast in a likely prelude to additional interest-rate cuts.

Turkey’s disinflationary momentum is staying intact even after the lira suffered the emerging world’s worst depreciation last month against the dollar. The Turkish currency on Friday slipped past a key psychological level and neared an all-time low despite efforts by state lenders to defend it. The lira traded 0.4% weaker at 7.0366 per dollar as of 2:28 p.m. in Istanbul.

Economists are less upbeat about inflation. It will finish this year at 10.6% and reach 9.9% at end-2021, according to a Bloomberg survey conducted April 24-28.

Turkey’s central bank predicts price growth will slow to 7.4% at the end of 2020 and decline to 5.4% a year later before stabilizing around the 5% target over the medium term. Its benchmark rate is at 8.75% after eight straight decreases since last July cut it by almost two-thirds.

April’s PMI survey found that currency weakness was mentioned as the main reason for higher input costs, with manufacturers responding by raising their output prices. The rate of inflation still slowed to the weakest since January because firms offered discounts in an effort to win orders, according to the report.

“The April PMI data provide a sobering insight into the dreadful impact the COVID-19 pandemic and associated lockdown measures had on the Turkish manufacturing sector during the month,” said Andrew Harker, economics director at IHS Markit. “Firms were unable to maintain hiring in the face of sharply falling workloads, and can only hope that conditions begin to ease in the coming months.”

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