Turkish downgrade puts economic slowdown in spotlight

Moody’s downgrade of Turkey’s sovereign credit rating this month and the loss of the country’s investment grade status caused a small and short-lived sell-off in local financial markets, but perhaps more importantly it shifted investors’ attention to the health of the economy. The past month has bought plenty to worry about on this front. The recent release of Q2 GDP data showed that growth had softened even before July’s coup attempt. And more timely figures suggest that the economy has slowed sharply since then. Retail spending (particularly on big-ticket items) has weakened and the industrial sector appears to be in a slump. Overall, we think GDP growth will come in below 2% y/y in the coming quarters, compared with growth of 4% y/y in the first half of the year. The recent run of weaker activity data seems to have shifted the central bank’s focus onto growth too. Against that backdrop, the MPC is likely to continue to ignore above-target inflation and ease monetary policy further.