Data announced this week attests to important trends regarding the manufacturing industry, employment and housing market. In a nutshell, data indicates that a sharp contraction has begun in the real sector and that fragility in the employment market has increased. However, it also showed that the policies implemented have not yet had the desired effect on consumption, expectations and asset prices. In today’s article, I will tell you about these developments one by one.
Let’s start with the manufacturing industry first. While the industrial production index increased by 1.6% on a monthly basis in September, it decreased by 2.4% on an annual basis. In the industry’s sub-sectors, 11 out of 13 groups experienced year-on-year contraction, suggesting that the malaise is widespread. If we look at the employment market, we see that the weakness manifest in recent months continues in September. Although the headline unemployment data seems low compared to the historical averages for the Turkish economy, the idle labor rate (broad based unemployment), which shows the general structure of the employment market, is oscillating around the highest rates since the COVID period.
If we look at the consumption side, we see that the desired slowdown has not occurred yet. The ongoing momentum in retail sales volume is well above the targeted slowdown on the demand side for the decline in inflation. We see similar developments on the expectations side as well. Real sector and household inflation expectations fluctuate around 50% and 65%, respectively, more than twice the Central Bank’s target of 21% for the end of 2025. In addition, the fact that the Central Bank and the government have increased their 2025 year-end inflation forecasts from 14% to 17.5% and then to 21% since August this year gives a negative signal in terms of expectation management.
Another negative data regarding expectations was the housing sales announced this week. Housing sales as of October have been rising for the last five months, reaching a total of 165 thousand in October, a three-year high, despite high interest rates. Housing sales in October increased by 76% compared to the same month of the previous year, reaching the highest amount in the last 22 months. 21 thousand of the houses sold in October – an annual increase of 278% – were on mortgage loans; reflecting households’ expectations that interest and inflation would remain high in the coming period and that housing was an important investment to protect savings.
Adding to the complexities of the Turkish economic management, CBRT Governor Karahan conveyed in the last Inflation Report meeting of the year, that ” adverse developments in the inflation are outside the sphere of influence of monetary policy”, referring to such items as food and rents. As I often express, his comment reinforced that “monetary policy alone is not enough to reduce inflation.” In summary; To reduce inflation, fiscal, administrative, institutional and structural policies need to be implemented in a holistic framework.
Translated from TEPAV think-tank blogs
Follow our English language YouTube videos @ REAL TURKEY: https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg
And content at Twitter: @AtillaEng
Facebook: Real Turkey Channel: https://www.facebook.com/realturkeychannel/