Turkish Manufacturing Slowdown Persists for 28th Month: Global Demand and Inflation Dynamics

The Turkish manufacturing sector remains entrenched in a prolonged slowdown, marking its 28th consecutive month of contraction. While the Istanbul Chamber of Industry (ISO) Turkey Manufacturing Purchasing Managers' Index (PMI) edged up to 47.7 in July, it stubbornly stayed below the critical 50.0 threshold, clearly indicating a continued significant deterioration in economic operating conditions.

Demand Stagnation and Global Spillover

The decline in new orders within the manufacturing sector persisted, albeit at a slightly softer pace compared to June. Key factors contributing to this contraction include:

■Adverse market conditions and escalating price pressures weakened domestic demand.

■The Middle East war exerted significant downward pressure on international demand since the beginning of the third quarter, negatively impacting export orders.

Production and Employment Contraction

The stagnant market conditions directly influenced manufacturers' production strategies:

■Manufacturers reduced output for the second consecutive month, albeit at a limited scale.

■Employment levels declined, partially attributed to workforce resignations.

■Weak demand prompted firms to scale back purchasing activities and inventories. This slowdown in input demand slightly eased pressure on supply chains, with supplier delivery times increasing at the slowest rate in nine months.

■Nevertheless, survey participants reported delays in sea freight.

Complex Inflationary Dynamics

Input prices continued their rapid ascent in July, yet complex signals emerged regarding inflationary dynamics:

■Firms reported increases in oil and raw material costs, with many participants directly linking these pressures to the Middle East war.

■However, input cost inflation moderated for the third consecutive month, reaching its lowest rate since November 2025, indicating some softening in cost pressures.

■Similarly, final product price inflation registered its lowest rate since early 2026. This development provided some flexibility for firms to curb price increases in an effort to stimulate demand.

The 28-month continuous slowdown in the Turkish manufacturing sector poses significant risks, particularly for SMEs and commercial lending. While the Central Bank's macroprudential measures and tight monetary policies aim to tame inflation, they may inadvertently curb commercial credit growth. Although the deceleration in input cost inflation is a positive sign, weak domestic and international demand will likely dampen firms' appetite for investment and production. This scenario could strain the banking sector's loan portfolio quality and limit new credit volumes. It is imperative for banks to further tighten risk management and deepen sector-specific analyses during this period.