However, according to sector PMIs in manufacturing, the data portrays a challenging picture as TRY weakness has adversely affected some sectors (although five out of ten sectors recorded PMIs above the 50 threshold in June).Īll in all, the recovery is likely attributable to the impact of reconstruction efforts, though the risks are on the downside for the second half of this year given higher FX volatility and a gradual tightening in the policy stance.

Real sector confidence has maintained its recovery since the beginning of this year.After returning to pre-earthquake levels in April, capacity utilisation continued to increase in the remainder of the second quarter.The manufacturing PMI has remained strong at 51.5 in the last three months to June implying a solid expansion in production despite currency volatility in the aftermath of the elections.While April industrial production reflected a weak start to the second quarter, recent data releases hint at strength in economic activity: Given the current pace of fiscal spending, pulling the 12M rolling budget deficit close to 3% of GDP in May, the government prepared a draft law forseeing an increase in revenues and control widening in the deficit.It is likely to narrow in the second half of the year mainly due to softer energy prices, although still-elevated demand, energy and gold imports remain a concern. The current account deficit has been on an expansionary path, implying the need for rebalancing.Annual inflation dropped in June with a better-than-expected monthly reading, while the downtrend continuing since last October seems to have come to an end.GDP growth is likely to improve in the second quarter of the year thanks to the impact of reconstruction efforts after this year's earthquake, though the risks are on the downside for the second half of 2023 given higher FX volatility and the signalling of a gradual tightening in the policy stance.While some of them are automatic adjustments, i.e, a rise in soft caps on lending rates with policy rate hikes, or aiming to reduce the impact of TRY weakness on deposit liraisation targets, a pivot to more conventional policies will take time. The Central Bank of Turkey (CBT) has taken steps to ease liraisation targets and security maintenance requirements.

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