Macro and Politics

*TURKSTAT will release the July inflation figures today @ 10:00 local time. We forecast a monthly CPI increase of 2.4% for July, which would bring the annual inflation rate to 34% from the previous month’s 35%. According to a survey conducted by ForInvest (previously known as Foreks), the market consensus estimates a 2.4% m/m CPI rise, perfectly in line with our house estimate. We expect the sharp monthly increase in July inflation to be driven largely by one-off price and tax adjustments. We estimate that the 25% hike in natural gas prices for households implemented by the state-run natural gas distributor Botas will add roughly 0.5pp to headline CPI, while increase in tobacco prices and fuel adjustments will contribute approximately 0.2pp and 0.3pp, respectively. Accordingly, we assess that around 1pp of the monthly rise will stem from these temporary factors, and the dissipation of their impact, we expect monthly CPI to retreat slightly below 2% in August. That said, we do not foresee a return to the subdued levels observed in June—when the print came in at 1.37%—until the latter part of the year. Our year-end inflation forecast remains at 31%.

*Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI declined further from 46.7 to 45.9 in July, marking the lowest reading so far this year and the weakest since October 2024. Remaining below the 50-threshold since March 2024, the index continues to signal a sustained loss of momentum in manufacturing activity for over a year. The accompanying note underlined that the Turkish manufacturing sector lost further momentum in July as muted demand conditions resulted in more pronounced slowdowns in new orders and output. In turn, manufacturers scaled back their staffing levels and purchasing activity, plus made efforts to limit inventory holdings. The note also highlighted that currency weakness was a key factor leading to further increases in input costs and output prices. The manufacturing PMI, which has been on a declining trajectory since February, underscores the prevailing contraction in industrial activity. Softening demand conditions continue to weigh on new orders and output, with the weakness appearing to have broadened across most sectors. Although the rate cuts that commenced in July are expected to bring about a partial improvement in demand dynamics in the second half of the year, we view the likelihood of a pronounced near-term rebound in industrial activity as limited. While economic momentum remained resilient in the first quarter, supported by domestic demand and net exports, we anticipate some moderation in the second quarter. That said, given the contribution of public expenditures to growth and the fact that household demand has not softened to the extent we had projected following the March 19 policy shift, we are maintaining our year-end forecast. As a result, we keep our 2025 year-end growth projection unchanged at 3.1%, with downside risks attched.