• Turkish industrial production in June showed a strong performance. Although yearon- year growth is still deeply in the red at minus 9.7%, the monthly increase in June was significant at 7.3% m/m. Overall industrial activity has risen 30% from the latest low seen in February 2009, and is now back at the level seen in November last year.
  • Thus, activity data back up the recent quite sharp rise in Turkish PMIs, which might suggest that the Turkish economy is not only stabilising, but is actually beginning to recover. The market reaction has been limited so far.

The Turkish economy has been one of the hardest hit during the present crisis. The economy dived into recession in Q1 as GDP dropped a whopping 13.8% y/y and capacity utilisation fell significantly. Especially the automotive sector was hit hard. In recent months however, we have seen a strong uptrend in PMI surveys and this has now materialised in hard data. Turkey's industrial production fell ‘only’ 9.7% y/y in June, but is up 30% since February this year. It is notable that manufacturing is still the main driver behind the lacklustre year-on-year numbers. Manufacturing is down 10.6% y/y, but it has risen 33% since February driven by a sharp rise in total motor vehicle production.

The numbers show some welcome stabilisation, but one should note that a large part of the recovery should be attributed to the inventory cycle. Since the beginning of Q4 2008 inventories have fallen markedly since production was scaled down much more than final demand dropped. With inventory levels still relatively depressed, activity might advance further in the coming months even without an acceleration in final demand. Hence, unless the Turkish economy is hit by another negative shock in the coming months, we are likely to see a significant improvement in the macro data during H2. However, the crucial question is whether this will be enough to create new jobs and spark a downtrend in unemployment.

Market reaction was limited. The Turkish lira is a little weaker today following the global sentiment, and swap rates are a little down across the curve. We like to play the macro-economic decoupling story in Turkey versus South Africa, as South Africa looks like an economic laggard compared to the rest of the emerging markets. We look for upside in TRY/ZAR going forward – possibly towards the 5.80-5.90 level.