Turkey’s calendar-adjusted industrial production index gained 3.2% y/y in June, marking the lowest annual growth rate registered since December 2016, data from national statistics office TUIK showed on August 16.

Markets had expected 5% y/y in annual growth.

“Pretty clear evidence of a hard landing playing out. Good in terms of quickly rebalancing the balance of payments. Bad for what it means for the credit profile - likely rising NPLs in banks, and balance sheet impairment,” Timothy Ash of Bluebay Asset Management said in an e-mailed comment.

“[Turkish] Banks appear to hedge all their on-balance sheet FX mismatches so they’re not directly exposed to the lira’s collapse. The bigger risk, instead, seems to be that currency weakness, rising borrowing costs and the ensuing recession causes non-performing loans to jump,” William Jackson and Liam Carson of Capital Economics warned on August 13 in a research note entitled “Where do the risks in Turkey’s banking sector lie?”.

Industrial production in Turkey has now stayed in annual growth territory for an uninterrupted 21 months running from October 2016 to June this year. Growth peaked with the 14.6% gain seen last July due to the base effect caused by the failed coup attempt in July 2016, after which Turkey hit an economic soft spot.

A 13.7% y/y rise was posted in December after which the annual growth rate declined for six months in a row this year.

Turkey’s Manufacturing Purchasing Managers' Index (PMI) recovered slightly from 46.8 in June to 49 in July, IHS Markit said on August 1.

Industrial production grew 8.8% in the first quarter of 2018, showing no real change of pace compared to the last quarter of 2017, according to the latest GDP data. In Q1 2018, the average monthly calendar-adjusted industrial production growth stood at 10% y/y and it slowed to 5.3% y/y in the second quarter.

Average annual industrial production growth quickened to 8.9% in 2017 from 3.4% in 2016, according to TUIK’s revised series of data. The previous data set pointed to average annual growth of 6.3% in 2017 and 1.8% in 2016.

Turkey’s manufacturing boom last year and early this year was substantially founded on the government's TRY250bn (€38bn) credit guarantee fund (CGF) for backstopping bank loans to businesses. Following the attempted coup and the brake it put on economic growth, Turkey spurred the economy by upping spending across the board, hiking wages, pouring capital into investments and guaranteeing loans with the CGF.

State-backed incentives have lost pace in 2018 despite the June 24 snap polls. Turkey is due to hold local polls in March 2019, but expectations are rising that the government will instead go for snap local polls in November, given that the economic deterioration is expected to accelerate and impact on the base vote.

The government recently cut its 2018 GDP growth target to 3-4% from the previous 5% due to the failing economy.