Turkey: Economic impact of failed coup likely to be limited
On 15 July, a small faction within the Turkish military attempted a coup which, however, failed within hours as there was neither public nor political backing, including from the opposition, for it. President Erdogan and the ruling AKP government are back in full control of the country. The immediate impact has been increased volatility on financial markets – as of today the TRY is down by about -6% against the USD and the ISE 100 is down by -8% as compared to pre-failed coup – which may continue in the next days or weeks. However, the Central Bank of Turkey (CBT) quickly announced it was ready to take any measures to ensure financial stability, if needed. And yesterday the CBT continued its gradual monetary easing cycle, lowering the overnight lending rate by 25bps to 8.75% while keeping the overnight borrowing rate at 7.25% and the key one-week repo rate at 7.5%, in line with expectations prior to the coup attempt. Euler Hermes does not expect a lasting, significant impact of the incident on the economy and maintains, for now, its forecast of full-year GDP growth of +3.6% in 2016. That said, country risk had already increased over the past three years and remains high, mainly reflecting (i) ongoing large current account deficits that are largely financed through short-term external debt which carries the risk of sudden reversal if investor sentiment changes; and (ii) increased political uncertainty and security risk as a result of spill-overs from the Syrian War and a series of terrorist attacks.
China: Faster, stronger, better? Not really…
Real GDP grew by +6.7% y/y in Q2 (unchanged from Q1) supported by a steady rise of tertiary sector activity (+7.5% y/y) and improved secondary sector production (+6.1%). In q/q terms, GDP growth accelerated to +1.8% in Q2 (from upwards revised +1.2% q/q in Q1) as a result of a strong stimulus. Monthly indicators were broadly positive except for investment. Real industrial production was up by +6.2% y/y in June (+6% in May). Nominal retail sales of consumer goods rose by +10.6% y/y. Growth of nominal urban fixed asset investment decelerated further (+9% y/y in Jan-Jun) with lower investment in the secondary sector and weaker private investment growth. Looking ahead, downside risks are still elevated. First, lower private investment and weaker business sentiment in manufacturing suggest lower activity growth in the short-run. Secondly, modest growth in global demand weighs on market opportunities. The weaker RMB helps ease the pain through improved competitiveness but weak export orders are still acting as a drag. For now, EH maintains its growth forecast of +6.5% for 2016.
Eurozone: Improving credit demand and supply
Banks reported looser credit conditions in Q2 for both corporates and households. Corporates in France, Italy and Germany were the main winners while for households, France, Italy and Spain were on top of the list. Banks expect broadly unchanged credit conditions on loans to corporates in Q3 while they expect a net loosening for loans to households. Increasing competition among banks is the main factor for the easing of credit conditions. In terms of demand, a positive trend has also been observed. For corporates, the overall low levels of interest rates are supportive for increasing credit demand, notably for financing M&A activities, inventories and working capital. For households, in addition to the low level of interest rates, improving housing market prospects and better consumer confidence are supportive for increasing credit demand. Banks have not yet reported any negative expectations for lending standards post Brexit. The Q3 survey to be published at end-October will be key to follow.
U.S.: Consumption strong, manufacturing and housing tepid
Consumption is on the rise as retail sales gained +0.6% m/m in June, the third consecutive increase. Ex-auto and gasoline sales rose +0.7% m/m to a strong +4.7% y/y. Although consumption was robust in Q2, we still maintain our 2016 GDP forecast at +1.9%, in part because manufacturing and housing are still weak. Manufacturing industrial production rose +0.4% m/m in June to a +0.4% y/y rate, well below the long-term average of +2.3%. Autos led the way with a +5.9% m/m surge. Ex-auto, manufacturing production fell by -1.2% y/y, an indicator that has been negative for 13 of the past 14 months. Housing starts rose +4.8% m/m and permits gained +1.5%. However, on a y/y basis, they are both falling at -2.0% and -13.6%, respectively. Inflation remains tame as consumer prices increased by 1.1% y/y in June, with core inflation (ex-food and energy) at 2.2% y/y. Producer price inflation was even weaker at 0.3% y/y with a core rate of 1.3% y/y.