Latest activity indicators show that the currency crisis has begun to impact the real economy in Q3, as expected (see also our Insight Turkey). In September, industrial production contracted by -2.7% m/m (after -1.3% in August) and also by -2.7% y/y, bringing the expansion in Q3 down to +1.6% y/y (from an average +7.6% y/y in H1). Moreover, real retail sales dropped by -4.6% m/m and -3.4% y/y, taking the performance in Q3 to just +0.4% y/y (which compares to an average +7.4% y/y in H1). The data suggests that investment and consumer spending are likely to decrease in H2 and perhaps also in 2019. We expect two to three quarters of real GDP contraction until mid-2019 and growth of just +0.4% in 2019 as a whole. Meanwhile, following the decisive 625bp interest rate hike in September, the TRY has recovered to around 5.35 against the USD from lows around 7.00 in mid-August, but its value is still -30% down YTD. As a result, the tradable sector has begun to rebalance as the markedly weaker currency has already caused a strong rise in import costs and a sharp contraction of imports (-17% y/y in September). In contrast, exports benefit from the more competitive currency and surged by +20% y/y. We expect the trade deficit will nearly half to –USD23bn in 2019 from around -USD43bn in 2018.
