Macro and Politics

* The Turkish economy expanded by 0.1% q/q and 2.5% y/y in 1Q26. Both our forecast and the market median had pointed to annual growth of 2.7%. While the services sector remained the primary driver of growth, the sequential slowdown in both private consumption and investment spending signaled a loss of momentum in economic activity. On the expenditure side, household consumption increased by a modest 0.1% q/q, while posting annual growth of 4.8%. We reckon that the relatively strong annual reading was largely supported by favorable base effects stemming from the weak outturn recorded in the same period of last year, whereas sequential data point to a marked moderation in domestic demand. Besides, government expenditure expanded by 3.3% q/q and 2.1% y/y in the first quarter. Moreover, gross fixed capital formation, meanwhile, contracted BY 2.2% q/q, indicating a notable weakening in investment activity. Exports of goods and services declined by 7.5% q/q in 1Q26, while imports contracted by 3.9%. On an annual basis, exports and imports fell by 12.7% and 2.0%, respectively, with net exports subtracting 2.5 percentage points from annual GDP growth. In contribution terms, household consumption added 3.4 percentage points to annual growth in 1Q26, while government spending and investment contributed 0.2 percentage points and 0.8 percentage points, respectively. Net exports reduced growth by 2.5 percentage points, while inventory accumulation contributed 0.5 percentage points. We maintain our 2026 growth forecast at 3.2%, although we continue to see risks skewed to the downside. Rising energy costs and heightened uncertainty following the US – Iran conflict are weighing on both production and demand conditions, while high-frequency indicators suggest that growth is likely to remain below the 3% threshold in the second quarter as well.

* The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI rose from 45.7 in April to 49.8 in May, reaching its highest level since March 2024. Although the index remained below the neutral 50 threshold for a 26^th consecutive month, its sharp improvement and close approach to expansion territory suggest that the deterioration in manufacturing sector conditions eased markedly during the month. According to the survey commentary, part of the increase in purchasing activity reflected firms’ efforts to build precautionary inventories in response to rising costs and supply disruptions associated with the conflict in the Middle East. The report also highlighted that input cost pressures remained elevated and supplier delivery times continued to lengthen. We therefore believe that part of the improvement observed in the headline PMI may have been driven by precautionary stock-building rather than a broad-based strengthening in underlying demand conditions, warranting a cautious assessment regarding the sustainability of the recent recovery. The ICI Turkey Sectoral PMI survey for May showed that, among the ten sectors monitored, only the clothing and leather products sector recorded growth in both output and new orders. While new orders in the food products sector showed signs of improvement, output continued to contract. The textile sector registered the sharpest declines in both production and new orders. Export demand remained broadly weak, with only the clothing and leather products sector and the chemicals, plastics and rubber sector reporting an increase in new export orders. Meanwhile, persistently elevated cost pressures, lengthening supplier delivery times across all sectors except machinery and metal products, and increasingly visible supply-chain disruptions in the chemicals, plastics and rubber sector suggest that underlying conditions across the manufacturing sector remain fragile.