July PMI: Hail the manufacturing sector; and the services, too

Down in the real sector, which tries to compensate for the damage caused by the pandemic, the acceleration of the activity turned completely positive as of July. As evident from the SAMEKS PMI data, the services sector made its first strong rebound in July which is likely to gain pace in August and September.  Beyond September the picture appears rather blurry tough.

Combined with other macro economic data announcements, the PMI levels for both manufacturing and the services sector show that Turkey’s economy made a strong start to the third quarter.  As the recovery in the manufacturing sector is to lose pace in the coming months, with the acceleration of the normalization observed in the travel, transportation and tourism sectors in the coming period, the acceleration in the service sector will increase.

The rapidly rising COVID-19 cases both in Turkey and around the globe risks new round of lock up measures starting from October 2020.  On the other hand, the current recovery momentum stands as threat to both the inflation that is already in double-digits at 12% and Turkey’s fragile balance of payments with the current account deficit rising fast at a time when the central banks FX reserves looking depleted and loss from Turkey’s tourism sector expected at least at USD 15bn.

Istanbul Chamber of Industry and IHS Markit signaled a strengthening recovery

The headline PMI posted 56.9 in July, up from 53.9 in June and the highest since February 2011. The reading pointed to a strengthening recovery following declines between March and May.

July saw sharp rates of expansion in both output and new orders, with capacity pressures emerging and firms taking on additional staff.  Thus, there is a strengthening recovery of the Turkish manufacturing sector following the COVID-19 related downturn. 

A move towards more normal conditions and the reopening of customers resulted in a second successive monthly increase in new orders at Turkish manufacturers. Moreover, the rate of expansion accelerated and was among the fastest since the survey began in June 2005. New export orders also rose, albeit to a lesser extent than total new business.

Production growth accelerated, and was the fastest since February 2011. Output has now risen in two consecutive months, with around 31% of firms signalling an increase in July.

The strength of the rise in new orders started to impart pressure on capacity, as signaled by a first accumulation of backlogs of work since August 2017. Firms used inventories to help meet order requirements, leading to the sharpest fall in stocks of finished goods in four months.

Higher production requirements led to increases in employment and purchasing activity, with both rising to greater extents than in the previous month.

The COVID-19 pandemic did continue to impact supply chains in July through restrictions on transportation. Rising demand for inputs also contributed to another marked instance of lengthening delivery times.

Input prices continued to rise sharply, albeit at a slower pace than in the previous month. The rate of output price inflation quickened, meanwhile, to the fastest since March as improving demand enabled firms to pass on higher input costs to customers.

Commenting on the Istanbul Chamber of Industry Turkey Manufacturing PMI survey data, Andrew Harker, Economics Director at IHS Markit, said:

“The PMI data at the start of the second half of the year provides optimism that the recovery from the COVID-19 downturn is solidifying. Sharp expansions in output and new orders were recorded as business conditions gradually return to normal, with even signs of capacity pressures emerging in the sector. Growth will help to claw back some of the output lost during the downturn, but will have to be sustained for a longer period for a full recovery to be secured.”

SAMEKS: Services sector PMI posted strong recovery

July 2020 results of SAMEKS prepared by MUSIAD have also been announced.

Accordingly, the SAMEKS Composite Index, adjusted for season and calendar effects, increased by 10.2 points in July compared to the previous month and reached 55.5.

The increase in the service sector index was 13.5 points compared to the previous month to 56.0 and was the main driver of the overall composite index.  The industrial sector index also increased but at a much milder pace with 0.5 points to 55.5.

While new orders, input purchases and a positive outlook in production continued throughout the industry sector, the recovery in the service sector accelerated and the business volume sub-index rose above 50 reference values after a 7-month break.

As a result of these developments, seasonally and calendar adjusted SAMEKS Compound Index, which increased by 10.2 points compared to the previous month, was once again over 50 reference values after 4 months, reaching the highest level of the year with 55.5 points.