- 1. US growth will remain solid.
The underlying fundamentals of the US domestic economy remain sound. Consumer spending has been increasing at rate of around 3% over the past year and is predicted to keep growing at the same pace in 2016. After an off year in 2014, housing activity picked up in 2015 and is likely to remain strong for the next couple of years. Nonresidential capital spending (excluding the energy sector) will also be a positive factor. Last but not least, thanks to the recent congressional budget agreement, government spending will be adding to GDP growth in 2016, after being a negative factor for the past three years. There were three negative influences on the economy in 2015: an inventory cycle, the collapse in energy sector investment, and the impact of a strong dollar and weak global growth. Two of these will ease in the coming year. The inventory correction is likely to be over by the first quarter of 2016, and the sharp drop in energy-related capital spending will probably end in the first half of the year. This means the growth rate of the US economy can be expected to remain in the 2.5–3.0% range in 2016.
What actually happened:US GDP grew a paltry 1.5% in 2016, mostly because of the continued decline in energy-sector investment and an abrupt slowdown in inventory investment.
- 2. Europe will keep growing at a modest pace.
After contracting for two years, the Eurozone economy began a modest recovery in 2014, expanding at a 0.9% rate. Growth accelerated a little in 2015 to 1.5%, and is expected to do marginally better in 2016 (1.7%). Four trends are supporting this improved outlook: low energy prices, reduced fiscal headwinds, more monetary stimulus, and a weak euro. The latter two can be expected to support growth even more in 2016. The ECB has indicated its willingness to provide additional stimulus, and IHS expects that the euro will depreciate further. A weakening currency is providing something of buffer for the Eurozone from weak global growth. While the human toll from the recent terrorist attacks in Paris is incalculably high, the economic impacts will be limited and short-lived. Moreover, in recent months, the risks of Greece leaving the Eurozone have diminished considerably. Meanwhile, UK economic growth will remain steady at 2.4%, and IHS expects that the upcoming referendum will probably not result in the United Kingdom leaving the European Union.
What actually happened:In 2016, economic growth is estimated at 1.6% in the Eurozone and 2.1% in the United Kingdom.
- 3. The Japanese economy will continue to limp along.
Revised data show that the Japanese economy avoided recession in 2015—negative growth in the second quarter was followed by positive growth in the third quarter. However, since 2011, Japan has suffered through three recessions, defined as two or more quarters of negative growth. There is a growing sense that while the three arrows of Abenomics—aggressive monetary easing, agile fiscal stimulus, and structural reforms—have lowered the yen considerably and boosted the stock market, they have had little impact on economic fundamentals. Specifically, after a brief bout of inflation, prices are stagnating again. More importantly, inflation-adjusted wages have fallen over the past three years, hampering consumer spending. The good news is that real wages have stopped declining recently. This will help consumer spending and housing. IHS expects that Japan’s growth rate will be a lackluster 1.0% in 2016, after an even more meagre 0.7% advance in 2015. One risk on the horizon is the planned April 2017 sales tax hike from 8% to 10%. This could trigger another spending cycle (as occurred in 2014), with buy-in advance behavior helping growth in late 2016 and early 2017, but increasing the risk of another downturn in mid-2017.
What actually happened:Japanese growth in 2016 was a lackluster 0.7%.
- 4. China’s economic activity will decelerate even more.
Since 2010, China’s growth rate has steadily declined. The past year was no exception, with 2015 growth expected to be 6.9%, compared with 7.3% in 2014 and 7.7% in 2013. IHS predicts that China’s growth rate will decline even further to 6.3% in 2016. In fact, the Communist Party has set a target to double the level of real GDP between 2010 and 2020, which implies an annual average target growth rate of 6.6% from now to 2020—the slowest target growth rate in a long time. The actual growth rate is likely to be even lower. Continuing problems (overcapacity, high debt levels, and low or negative rates of return) in the heavy manufacturing, utilities, and mining sectors have been—and will continue to be—the principal drags on the economy. On the other hand, the services sectors and light manufacturing are proving more resilient. At the same time, the news on the real estate markets is no longer uniformly bad. Home sales are picking up, although high inventories will continue to dampen construction activity. Neither the change in the government’s one-child policy nor the Chinese renminbi’s inclusion in the IMF’s special drawing rights basket is likely to have a big impact in the near term.
What actually happened:China’s growth rate edged down from 6.9% in 2015 to 6.7% in 2016, as a surge in investment by state-owned firms cushioned the deceleration.
- 5. Some emerging markets will remain in recession, while growth elsewhere will disappoint.
Since the beginning of 2013, emerging markets have been hit by a “perfect storm”: plunging commodity prices, capital outflows, and plummeting currencies (forcing some central banks to raise interest rates, even during recessions); swooning stock markets; and stagnating world trade. Those hit hardest have been commodity exporters, especially those with weak finances or other structural problems. This includes oil exporters such as Iran, Venezuela, Libya, and Algeria; whereas strong reserves and better finances have protected Saudi Arabia, Kuwait, and the United Arab Emirates. Two of the hardest-hit economies have been Brazil and Russia, both of which are suffering deep recessions. At the other extreme, net commodity importers such as India are doing much better. The recessions in Brazil and Russia are expected to last into 2016, and growth in most emerging markets will remain challenged by weak global growth, fragile exchange rates, and low commodity prices. Nevertheless, as commodity prices bottom out in 2016, the pressures on emerging markets will likely ease.
What actually happened:Brazil, Russia, and Venezuela remained in recession, while growth in most emerging regions either slowed or held steady.
- 6. Commodity prices will reach a trough.
Commodity prices have fallen by about one-third over the past year and are down nearly 60% since the beginning of 2014. The biggest factors behind the plunge in nonoil commodity markets have been the struggles in China’s manufacturing sectors and the associated large declines in its imports from the rest of the world. While suppliers have cut production, demand has weakened even more. Production cutbacks are likely to continue, and IHS expects that prices will begin to firm during 2016. In the case of oil, weak demand from China was compounded by strong production from the United States and the decision by OPEC to not cut production. Low prices are having an effect on US producers. IHS expects a cut in US output of roughly 600,000 barrels per day between mid-2015 and mid-2016. This will likely be enough to put a floor on prices. However, lower US production costs and increased productivity will continue to push break-even points lower, limiting upside price risks in 2016. The prices of both oil and other commodities are expected to be flat though the first half of 2016, and then begin to rise gradually in the second half.
What actually happened:Most commodity prices hit a trough at the beginning of the year and then began to rise.
- 7. Any rise in inflation will be modest.
A variety of factors have conspired to keep inflation in many parts of the world in check. Principal among these are the large amounts of excess capacity worldwide and the nosedive in commodity prices. Assuming that commodity prices are either flat or fall more, this benign state of affairs will continue throughout 2016. There are two exceptions to the low-inflation picture. First, in countries where currencies have also tumbled, inflation rates have risen. Brazil and Russia are cases in point. The other exception is a potential rather than an actual threat. Both in the United Kingdom and the United States, labor markets are becoming tighter. This is manifesting itself in a modest upward movement in wage inflation. By some measures, there is additional slack in the American and British labor markets. This means that any rises in wage inflation in the coming year will probably be small. Moreover, in light of the (still) vast amounts of excess capacity worldwide, inflationary pressures in most parts of the global economy will remain muted throughout much of 2016.
What actually happened:With the exception of Japan (which experienced slight deflation in 2016), there was a modest rise in inflation in most developed economies.
- 8. The Federal Reserve and the Bank of England will raise interest rates a little, while other central banks will either be on hold or ease more.
During 2016, diverging economic fundamentals will call for different monetary policy actions. The United States and United Kingdom will be growing faster than most other developed economies. With early signs of wage inflation in both economies, the Federal Reserve and the Bank of England (BoE) will raise interest rates sooner than their peers. The Fed is set to hike rates in December (for the first time since 2006), and the BoE will probably follow suit by midyear. There is a good chance that the Bank of Canada may also jump on the rate-hike band wagon by the end of the year. The good news is that even with these “first movers,” interest rates will remain very low (negative in inflation-adjusted terms) through the end of 2016. Meanwhile, in December, the European Central Bank pushed overnight rates further into negative territory and extended its quantitative easing program. Considering the fragile nature of Japan’s economy, there is a chance that the Bank of Japan may also extend or expand its bond-purchasing program.
What actually happened:The Fed raised rates in December 2015 and is on track to raise them again in December 2016; however, the European Central Bank, Bank of England, and the Bank of Japan provided more stimulus.
- 9. The US dollar will rise further.
Over the past year, the dollar has risen about 8% against other major currencies. Its appreciation against some emerging-market currencies has been even larger. In light of stronger US fundamentals relative to the rest of the world, and given that the Fed is likely to be the first major central bank to raise interest rates, IHS expects that the dollar will appreciate another 3–5% in the first half of 2016, before topping out. This means that the dollar/euro rate will approach parity by the middle of 2016, reaching as low as $1.02 by midyear. Similarly, the yen is predicted to hit 126 per dollar by the end of 2016. The Chinese renminbi is also set to depreciate gradually against the dollar. This is a function of downward pressure on the currency from capital outflows, as well as the commitment by Chinese policymakers to limit the amount of intervention in foreign exchange markets (as part of China’s new status as a reserve currency). That said, IHS does not expect any dramatic changes in the dollar/renminbi rate. The currency will continue to be managed, but not in as rigid a way as before. Thus, depreciation on the order of around 4% in 2016 seems most likely.
What actually happened:The dollar did rise throughout much of 2016, and then surged after the presidential election (in anticipation of large fiscal stimulus in the United States).
- 10. The risks buffeting the global economy will likely not derail it.
As highlighted above, there is no shortage of risks facing the global economy. Fortunately, none has done severe damage—so far. Just as importantly, the usual “recovery killers” are a distant threat. First, with a few exceptions, policy tightening is not a danger to recoveries in most parts of the world. In fact, from a global perspective, monetary policy may become a little more stimulative in 2016. Second, the net effect of the commodity rout on global growth is positive, albeit small. Third, asset bubbles (and the potential for them bursting) are not a significant hazard. Finally, while the risk of even slower growth in China is high, the impacts on the developed world and commodity-importing emerging markets is limited. The one risk that could derail global growth in the near term is a big oil shock, triggered by an escalation of the Middle East conflicts. Fortunately, the probability of such an event in 2016 is relatively low. Since 2011, the upside and downside risks to the world economy have largely offset one another, leaving growth stuck in the 2.5–3.0% range—the same is likely to be the case in 2016.
What actually happened:In 2016 the global economy was rocked by financial turmoil and political upsets, which slowed the global recovery but did not push it into recession.