Is that your final answer?
the most critical week of WE ARE ENTERING the month. There are three factors that we expected to determine the course of the economy in March: Russia-Ukraine tensions, the Fed’s interest rate decision, and the interest rate decision of the Monetary Policy Committee in Turkey. Two of these will be clear this week.
Let’s start with last week…
NEW RECORD IN CONSTRUCTION COSTS
Construction costs increased by 15.2% compared to the previous month and 79.9% compared to the previous year, according to the January data announced last week. The construction cost index increased to 464.6.
Very sharp rises were seen in construction costs starting by mid-2021. The increase has two main reasons. Initially, commodity prices started to climb globally. The rise in the exchange rates in Turkey since last fall then accelerated the increase in costs. Costs have increased by 50% from September to date. These are unprecedented increases.
The Turkish Statistical Institute (Turk Stat) calculates construction costs under two main headlines: material cost and labor cost. The rise in material cost began a while ago. The January data shows that the rise has reached new heights at 98%. On the other hand, we have witnessed the largest increase in labor costs at 41% due to pay raises in January.
Let me remind you that this data is from January when there was no war. Very sharp rises were seen in commodity prices from January to date. Iron, glass, cement, plastic, ceramic prices are constantly reaching historic peaks. We have witnessed a rise in exchange rates over the last few weeks. Therefore, we will see that the fast rise in costs will continue in February and March data.
The increase in costs is reflected in the new residential prices. Below you can see the course of both indices.
The construction cost index is one month ahead of the housing price index. Therefore, we will witness a similar increase this week, when the housing price index for January is announced. However, February and March prices will be higher.
Another large risk in terms of cost and price in the domestic market is exchange rates. If the increase in internal exchange rates puts extra pressure on the increase in global commodity prices, three months from now today’s prices will be considered very cheap.
CURRENT ACCOUNT DEFICIT AT FOUR YEAR PEAK
The current balance was USD 7.1bn in January, according to the balance of payments data announced Friday morning. The deficit level is very close to last week’s forecasts but far from the hopes of a few months ago. The largest deficit of the last four years on a monthly basis was announced. The 12-month deficit has exceeded USD 20bn.
The economic administration, which started the year with a surplus in current account deficit targets, is facing the risk of giving a deficit far higher than last year. The current account deficit (CAD) may be slightly lower than today in February, but for March, when the war started, CAD will likely reach USD 20bn.
INDUSTRIAL PRODUCTION SLOWS
January industrial production, which was announced on Friday morning, increased by 7.6% compared to the previous year, according to the calendar adjusted data. Although production continued to grow, the rate of increase fell to its lowest level since August 2020.
The main factor keeping industrial production alive in the past months was the increase in exports. This effect will continue in the coming months. Although industrial production in Turkey’s target markets for exports has slowed in the last few months, it has taken a strong step towards growth again in February. Therefore, unless there is a sudden slowdown in domestic demand, industrial production may continue to grow in the coming months.
‘MY UPS AND DOWNS’: HOUSING SALES
House sales across the country have historically fluctuated in a more stable band; revivals or stagnations had been milder until the last few years. Both the ups and downs got tougher as of the end of 2019. The gap has reached the 60,000-120,000 band. We started to see rapid growth for three to four months in a row and then regressions at the same rate. Sales data for February will be released this Tuesday morning.
The biggest obstacle to the revival in the housing market at the moment
is the rapid increase in prices. Low stock in new housing is another factor that drives prices up.
FED EXPECTATIONS
Many expected that the Fed would raise interest rates at least three times this year, with some predicting 50 basis-point increases until a few weeks ago.
Although the Russia-Ukraine War has not yet dispelled this expectation, it has significantly reduced the number of its defenders.
The rate decision, which will be made on Wednesday evening this week, is likely to see an increase of 25 basis points. But expectations about the number and severity of rate hikes have become more moderate.
WHAT WILL MPC’S DECISION BE?
Of course, the most critical moments of the week will be on Thursday afternoon. The Monetary Policy Committee will decide at its meeting this week whether to continue with the current policy rate or not.
We do not know whether the Central Bank, which lowered the policy rate below the inflation rate in September, going beyond the known economic rules, would have made such a decision if it knew it would lead to today’s results. We are facing a CPI increase of around 55% against the current 14% policy rate, meaning that the real interest rate is around -40. Moreover, inflation will certainly increase even more in the next few months.
From this perspective, we should have said, “There will be a clear and strong interest rate increase from the MPC.” But we haven’t been able to form such sentences for six months. Still, we can say that we have never been this close to a rate hike in the last six months. The war, the rising current account deficit, the resumption of the exchange rate, the sharp rise in CDS premiums, and the interest rate hike moves by the Fed inevitably strengthen this expectation. Therefore, the members at the MPC meeting need to ask each other the following question: “Is this your final answer?”
The Istanbul Chamber of Industry (ISO) Turkey Manufacturing Export Climate Index, which measures the contributions of the country ’s manufacturing industry to primary export markets, increased by 2.9 points from 52.3 points to 55.2 points in February, compared to the previous month. Thus, the index has reached the highest level since August 2021. The demand conditions showed signs of improvement after the Omicron variant eased in some key export markets of Turkish manufacturers. Output trends in the top six export destinations of Turkish manufactured products showed improvement in the middle of the first quarter amid reduced COVID -19 disruption. Non-oil activities steadily increased and growth strengthened in the UAE, a key export market for Turkish manufacturers in the Middle East. Output remained unchanged for the second successive month in China, while economic activity in Japan has recorded its fastest decline since August 2021.
REAL EFFECTIVE EXCHANGE RATE CONTINUES TO REBOUND
The Consumer Price Index (CPI)based real effective exchange rate (REER) increased by 3.8% from 52.77 to 54.78 in February, compared to the previous month, according to the Central Bank. The CPI-based REER has continued to rise for the second successive month after hitting historic lows in December 2021. The Domestic Producer Price Index (D -PPI)-based REER also rose from 71.27 to 75.18 points in February, month over month. The CPI (developing countries-based) REER increased from 43.33 to 44.91 in February, while CPI (developed countries-based) REER was up from 59.72 to 62.08 compared to January. The increase in the REER means TRY appreciation.
AIRPORTS SEE 9.4 MILLION PASSENGERS IN FEBRUARY
Turkey’s airports hosted 9.4 million passengers in February, according to the General Directorate of State Airports Authority (DHMI). The February figure was 74% higher than February 2021, when the number of air passengers had fallen significantly due to the COVID -19 pandemic, and neared February 2019 figures, before the pandemic. Some 5.22 million passengers took domestic flights, while 4.16 million took international flights last month. Turkish airports served 105,990 aircraft in February, including overflights, with 51,021 on domestic routes and 32,401 on international routes. Air cargo traffic reached 235,581 tons last month. In January-February, the number of air passengers through Turkish airports hit 18.7 million. Plane traffic in the first two months of this year was 218,091.
AUTO SALES DOWN BY 15% IN FEBRUARY
Passenger car and light commercial vehicle (LCV) sales dropped by 15.1% to 49,652 units in February, compared to the same month last year, according to the Automotive Distributors’ Association (ODD). Passenger car sales declined by 15.9% to 37,641 units, while LCV sales decreased by 12.7% to 12,011 units in the same period. The passenger car and LCV market expanded by 8.6% in February compared to the 10-year average February sales. Passenger car and LCV sales increased by 30% in February compared to the previous month. Passenger car and LCV sales dropped by 13.0% to 38,131 units in January year-on-year.
The annual inflation rate jumped to 54.44% as consumer prices increased by 4.81% in February, according to the Turkish Statistical Institute (TurkStat). Annual inflation hit a 19-year high in February, seeing its highest level since March 2002, and monthly inflation exceeded estimations. The surge stemmed from a hike in energy prices and the sharp increase in food inflation, especially in the fresh fruits and vegetable group, despite the value-added tax (VAT)
reduction. Analysts estimate annual inflation will exceed 60% in March. The expectation for year-end inflation was a decline with the base effect. Estimates hover around 38-40% due to the jump in the cost of agricultural products and energy stemming from the Russia-Ukraine war and the surge in foreign exchange rates led by the Federal Reserve’s interest rate increase. The domestic producer price index (D -PPI) increased monthover-month by 7.22% in February. The D -PPI saw a three-digit figure after 28 years at 105.01% on an annual basis last month. The D-PPI is expected to annually see a three-digit number in the coming months.