Turkey's Industrial Sector: Navigating Volatility and Recovery in a Fragmented Landscape

Turkey's industrial sector in 2025 is a study in contrasts. While manufacturing output surged by 9.5% year-on-year in June, driven by robust demand for automotive and machinery exports, the mining and energy subsectors lagged, with electricity production declining by 1.1%. This divergence underscores a complex recovery narrative: one where cyclical rebounds in key industries clash with structural vulnerabilities like currency instability, energy dependency, and geopolitical realignment. For investors, the question is not whether Turkey's industrial sector is growing, but whether this growth is sustainable—and where to allocate capital amid the risks.

Cyclical Rebounds: Manufacturing as the Engine of Growth

The manufacturing sector has been the standout performer, with June 2025 data showing a 9.5% annual increase in output. This growth is fueled by Turkey's deepening integration into European supply chains, particularly in automotive and machinery. Turkish firms now supply critical components to German automakers, with exports of vehicle parts and accessories reaching $1.65 billion in 2023 alone. The sector's resilience is further bolstered by Turkey's strategic location, which positions it as a nearshoring hub for European firms seeking to diversify away from Asian manufacturing centers.

However, this growth is not uniform. The textile and chemical subsectors, which together account for 15% of Turkey's industrial output, have struggled. Textile production fell by 3.3% in April 2025, with apparel exports declining by 9.8% monthly. High input costs, exacerbated by a 63.2% compound interest rate and a 35% inflation rate, have eroded margins. Meanwhile, the chemical industry faces similar headwinds, with tightening financial conditions and global demand volatility dragging down performance.

Structural Challenges: Currency Volatility and Energy Costs

The Turkish lira's depreciation—down 11.35% against the dollar in 2025—has compounded these challenges. Despite the Central Bank of the Republic of Turkey (CBRT) maintaining a 46% policy rate, inflation remains stubbornly high at 35.05%, with core inflation hitting 35.64%. This creates a paradox: high rates are meant to curb inflation, yet they also increase borrowing costs for capital-intensive industries like chemicals and textiles.

Energy costs add another layer of risk. Turkey imports over 90% of its energy needs, and geopolitical tensions in the Middle East have driven up prices. For instance, the cost of natural gas has risen by 40% year-to-date, directly impacting energy-intensive industries. The CBRT's recent forecast of a lira-dollar rate of 42 by year-end 2025 suggests further currency weakness, which could exacerbate inflation and reduce the competitiveness of Turkish exports.

Policy and Geopolitical Catalysts

Turkey's industrial policy in 2025 is a dual-edged sword. On one hand, the government is pushing for alignment with the European Green Deal, aiming to position the country as a green technology hub. On the other, its geopolitical pivot toward non-Western partners—such as Russia and China—has created tensions with the EU. This duality is evident in the automotive sector, where Turkish firms are deeply integrated into German supply chains but also face scrutiny over labor rights and environmental standards.

Recent policy changes, such as the 30–166.7% customs duties on imported textiles, aim to protect domestic producers but risk alienating trade partners. Meanwhile, infrastructure projects like the Istanbul New Airport and the Marmaray rail system are expected to improve logistics, potentially boosting manufacturing efficiency. However, these projects remain vulnerable to funding shortfalls and political instability.

Investment Implications: Where to Play and Where to Avoid

For medium-term investors, the key is to differentiate between cyclical opportunities and structural risks. The manufacturing sector—particularly automotive and machinery—offers the most compelling case. Turkish firms integrated into European supply chains are likely to benefit from nearshoring trends, with exports to Germany projected to grow by 8–10% in 2026. However, investors should avoid overexposure to the textile and chemical subsectors, which face margin compression and global competition.

Currency hedging is critical. Given the lira's volatility, investors might consider short-term positions in inverse currency ETFs or hard assets like gold. Additionally, energy-linked commodities could serve as a hedge against Turkey's energy import costs.

Conclusion: A Calculated Approach to a Fragmented Recovery

Turkey's industrial sector is at a crossroads. While manufacturing growth and supply chain integration offer a path to recovery, structural challenges like currency instability and energy costs threaten to undermine progress. For investors, the path forward requires a nuanced strategy: capitalizing on the resilience of manufacturing while hedging against macroeconomic risks. As the CBRT's policy trajectory and geopolitical dynamics evolve, Turkey's industrial sector will remain a high-risk, high-reward proposition—one that demands both vigilance and agility.