Production in a country is made to meet domestic demand and export demand in that country. For Turkey’s industrial sector, industrial production varies according to domestic demand and exports from Turkey to other countries. One of the best indicators of domestic demand, adjusted for inflation, is the retail sales volume index. This index and the industrial production index are usually very close to each other.
Although they sometimes diverge from each other, their main trends are the same. However, the close relationship between the two indicators started to deteriorate in 2022. While there was no significant change in industrial production, consumption increased rapidly. The problem continued to worsen in 2023. I won’t go into the reasons for this, but as we all know, ultra-loose monetary policy and negative interest rates were at the root of the problem.
What we have seen as a result is an industrial sector that has contracted for four quarters in a row, growth driven by consumption rather than production, rapidly rising imports and a current account deficit.
Retail sales volume index continues its upward trend with a slowdown. The slowdown here means a slowdown in consumption. A slowdown in consumption is a factor that pulls down imports and improves the current account balance. So can we slow down domestic consumption on the one hand and accelerate production on the other? If external demand were strong, yes, but in the current conjuncture, it is a bit difficult in the short term.
We need to focus on exports to accelerate production growth, but external demand will remain weak for most of 2024, as it was in 2023. We will have to be patient until we see a pickup in exports in the last quarter. On the other hand, in the first half of 2022 and 2023, rapidly rising domestic costs could not be reflected in export prices due to the semi-fixed exchange rate, resulting in the loss of customers or lower export volumes for many companies.
We see that these companies have not yet returned to foreign markets. The last question is this: When will the balance between production and consumption growth be restored?
The answer to this question again points to the last months of the year. Theoretically, it is possible to realize this in a few months, but in that case, we are currently in the process of a gradual slowdown, as trade would come to a halt very quickly and the associated reactions would develop. The re-establishment of the weakening relationship between consumption and production depends more on a slowdown in the pace of consumption than on an increase in production in 2024.
From the end of 2024, we will see production start to accelerate. Until the fall (when exports start to support growth again), we will continue with the slowdown in consumption. After the production increase comes into effect, it seems that consumption will be gradually relieved with interest rate cuts.