The biggest development since our last update was the precipitous decline in the value of the Turkish lira and the consequent spasm in emerging markets. (The lira is down 61 percent on the dollar since the beginning of the year.) In a sense, both of the forecasts we update this week were shaped by the fallout of the currency crunch: the unexpected improvement of Russia-Turkey relations, and a serious threat to the relative stability of South America.
Back in December, we identified the lira’s vulnerability but failed to see the full extent of how it would affect U.S.-Turkey relations. The degradation of that relationship has a host of global implications, including China’s subsequent courtship of the government in Ankara, the growing concern in Europe over potential exposure to the currency crisis and the migration it might portend, and uncertainty over next steps in Syria. Relations are not past a breaking point, but how the U.S. and Turkey work to patch things up will be a key