Macro and Politics

*Istanbul Chamber of Industry (ICI) Turkey May Manufacturing PMI will be announced @ 10:00 local time. The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI remained unchanged at 47.3 in April, holding at its lowest level since October. Persistently below the 50-threshold since March 2024, the PMI continues to signal a sustained slowdown in manufacturing sector activity. Following an average of 47.73 in the final quarter of 2024, the index recorded a marginal uptick to 47.87 in the first quarter of 2025, indicating no palpable change in momentum. The accompanying note underlined that the Turkish manufacturing sector continued to face challenges in April, although there were some signs of improvement as rates of moderation in output, new orders and exports all eased. The note highlighted that firms again scaled back employment and purchasing activity, while muted demand conditions contributed to the most pronounced quickening of vendor lead times since the end of 2022.

*Turkey’s economy grew by 2% y/y and 1% q/q in 1Q25, coming in slightly below expectations, as both our house forecast and the market consensus had pointed to a 2.3% annual growth rate. An expenditure-side breakdown of the 1Q25 performance reveals that the strongest contribution to growth came again from household consumption, which rose by 2% y/y and contributed 1.6ppt to the annual growth rate. Moreover, public spending increased by 1.2% y/y, adding approximately 0.2ppt to growth and indicating that fiscal policy remained supportive of economic activity during the quarter, while inventory build-up posted an annual rise of 2.1%, contributing an additional 0.2ppt to overall growth. Meanwhile, exports remained flat, while imports rose by 3%, leading to a negative contribution of 0.6pt from net exports to headline growth. While the economy entered 2025 on a relatively strong footing, supported by resilient domestic demand, we expect growth to lose momentum in the second quarter. We maintain our 2025 growth forecast at 3.1%, though we believe downside risks are mounting. Given the recent domestic developments and tightening financial conditions, we believe the likelihood of full-year GDP growth coming in below 3% in 2025 has increased significantly.

* The adjusted unemployment rate climbed from 8% to 8.6% in April. As per the broad-based unemployment calculations: The rate of composite measure of labor underutilization – including time related underemployment, potential labor force and unemployment – rose sharply from 28.8% to 32.2%, marking an all-time high and signaling a pronounced weakening in labor market conditions. Moreover, the combined rate of time-related underemployment and unemployment rose from 17.9% to 22.5%, while the combined rate of unemployment and potential labor force edged down from 20.1% to 20%. Heightened domestic financial turbulence starting from March 19 and the subsequent tightening measures introduced by the CBT are expected to weigh more explicitly on economic activity as of the second quarter. Accordingly, rather than focusing solely on the headline unemployment rate, we anticipate that the rate of composite measure of labor underutilization, which we monitor more closely, will remain elevated, reflecting persistent weakening in the labor market.