Macro and Politics

*Istanbul Chamber of Industry (ICI) Turkey June Manufacturing PMI will be announced @ 10:00 local time. The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI rose from 45.7 to 49.8 in May, reaching its highest level since March 2024. While this marked the 26th consecutive month of slowdown across the manufacturing sector, the index’s significant move closer to the neutral 50 threshold suggested that the deterioration in operating conditions eased markedly as of May. We believe part of the improvement observed in the PMI index during May may have been driven by precautionary inventory accumulation by firms, suggesting that the sustainability of this recovery should be assessed with caution. Despite the recent improvement we continue to observe across leading indicators, high-frequency data still suggest that annual growth is likely to remain below 3% in the second quarter. Looking ahead, we expect economic activity to move toward a more balanced trajectory in 2H26 as financial conditions gradually ease in line with our expectation of a phased normalization in monetary conditions. Accordingly, we maintain our 2026 growth forecast at 3.2%.

* According to foreign trade data released by TURKSTAT, exports declined by 9.5% y/y to USD22.5bn in May, while imports fell by 10.8% to USD28.1bn. Driven by the decline in imports, the foreign trade deficit narrowed from USD8.5bn in April to USD5.6bn in May, marking its lowest level since August 2025. On a 12-month rolling basis, the trade deficit also eased from USD94.5bn to USD93.5bn. Looking at core figures, exports excluding gold and energy contracted by 11.5% to USD20.5bn, while imports excluding these categories declined by 16.2% to USD21bn. As a result, the core foreign trade deficit narrowed sharply from USD2.5bn in the previous month to only USD500mn in May. After exceeding USD9bn in March, the current account deficit declined to USD5.7bn in April. We expect the short-term improvement trend we observed in April to continue into May as well. However, despite the recent correction in energy prices, we do not foresee a lasting improvement in the near-term external balance, given the drag created by elevated energy imports accumulated during March and April. Our year-end current account deficit forecast stands at USD54bn, corresponding to 3.0% of GDP. Trade data also provide important signals regarding industrial production dynamics. The recent trend in intermediate goods imports excluding gold and energy points to a more visible loss of momentum in industrial production during May. In addition, we expect the bridge-day effect associated with the Eid al-Adha holiday in May to generate additional downside pressure on industrial production data. Nevertheless, as this temporary distortion fades in June and base effects turn more supportive, we expect industrial production figures to return to positive territory.

* The seasonally adjusted unemployment rate remained unchanged at 8.2% in May, while the broad underutilization rate — which we closely monitor as a more comprehensive gauge of labor market conditions, and which includes time-related underemployment, potential labor force and unemployment — increased from 30.1% to 31.0% over the same period. A breakdown of the subcomponents shows that the combined rate of time-related underemployment and unemployment rose from 19.3% to 20.2%, whereas the combined rate of unemployment and potential labor force remained stable at 20.5%. The fact that broad unemployment continues to remain above the 30% threshold suggests that fragilities in the labor market remain elevated. While the relatively subdued headline unemployment rate indicates that the narrow definition of unemployment fails to fully capture the underlying weakness in labor market conditions, the persistently high level of potential labor force points to significant remaining slack in the labor market. Taken together, we believe labor market conditions continue to present a weaker picture than what the headline unemployment rate of 8.2% alone would imply.