Since the beginning of this year, the global pandemic has thrust Turkish businesses and private lives into a very difficult period. The country, however, has managed to pass through this bittersweet summer as industry sectors focused on tidying things up to ensure a significant domestic market recovery and export connectivity.

This struggle was successfully carried out by the real sector. In terms of production and exports, the first half of August was spent in third gear. With the arrival of the religious and extended virus holidays, the economy could take a breather. On the other hand, in the second half of August, it can be said that the real sector and Turkish exporters moved into fourth or even fifth gear.

Turkey's Purchasing Managers' Index (PMI) data, which was revealed by the Istanbul Chamber of Industry (ISO), confirms this idea. As a matter of fact, it shows a positive and strong production situation in July as the PMI was at 56.9 and it retreated down to 54.3 in August.

One pleasing detail is that the Turkish manufacturing industry left the June-August period in a powerful position. It thus confirms the "V type" recovery after a sharp contraction in the PMI index due to the collapse of production in March and April.

During the June-August period, the overall sense of holiday spirit in the world and the prolonged effects of the Eid holiday in Turkey, a rise was observed in the ISO's PMI Index for new export orders, despite a partial slowdown.

The re-increase in production in the fields of food, clothing and leather products was important for the growth expectations for the third-quarter period.

Besides, the highest increase was in the metal category, which also fed many other sectors in the manufacturing industry. Thirdly, a production increase was attained in eight of the 10 closely followed sectors in August.

According to the above-mentioned leading indicators, third-quarter growth is estimated at between 4.5% and 7.9%. Such a development undoubtedly increases the likelihood that Turkey will close 2020 with a very limited recession or maybe even a little positive growth.

Recovery and inflation

The inflation data announced by the Istanbul Chamber of Commerce (ITO) on the first day of each month increases our hope that the downward trend will continue for September.

The fact that retail, that is, consumer inflation, which increased by 2.53% on a monthly basis during August of last year, remained at 0.59% in the same month of 2020, and consequently that inflation, which was at 16.41% on an annualized basis in 2019 and 13.41% last July, fell to 11.27% this August, are all very encouraging.

Interestingly, in recent years, despite being Turkey's largest metropolis, Istanbul produces lower inflation than many other areas. The statistical region that includes the provinces of Kayseri, Sivas and Yozgat produced the highest inflation in August with 1.25%.

This is followed by the statistical region where the provinces of Adana and Mersin are located with 1.22%. The inflation rates of Hatay, Kahramanmaraş and Osmaniye as one region, Şanlıurfa and Diyarbakır as another and Konya and Karaman as a third are respectively 1.13%, 1.07% and 1.05%.

The total inflation of the eight statistical regions is above that of Istanbul as the metropolis' rate was 0.86% for August, the same as last year. In 2018, on the other hand, inflation increased by 2.3% on a monthly basis due to a "currency attack."

Therefore, for the last two months, the headline inflation, which was annualized at 11.76% and 11.77% in July and August respectively, remained the same. The minus 2.11% in the main spending group of clothing and footwear and minus 0.08% in the main expenditure group of food and non-alcoholic beverages, however, were both significant.

The inflation rate produced by the miscellaneous goods and services spending group – which includes products such as men's and women's personal care services and products, hygienic and disinfectant products, insurance and advocacy services, education and travel expenses and watches and jewelry – was 5.09% on a monthly basis, more than four times the monthly inflation rate. When we add to this that the price increase in hotels and restaurants was 1.8 times fold, it is understood that the sectors producing goods and services are still in a hurry to compensate for the financial losses they suffered in the first three months of the pandemic.

Under these circumstances, if monthly inflation remains below 0.99% in September and under 1% in October of this year, especially remembering that the rate for last October was 2%, we will have a noticeable improvement in annualized headline inflation.

While C-type core inflation is slightly below annual inflation, D-type is a little above. The increase in the domestic producer price indices (PPI), which indicates the rise in input expenses of firms producing goods for domestic sale, basically cost inflation, should also be closely followed. Despite the pandemic, Turkey’s ability to demonstrate good cost management will accelerate the recovery in inflation.