By Shane Brett
Every year Global Perspectives publishes its predictions of the 5 keys trends we see impacting the global economy in the year ahead.
For many parts of the world economy 2016 could be summed up in 4 words – more of the same.
- US powers the Global Economy
The US economy created an average of 50,000 jobs every week in 2015. This will continue in 2016 and growth will average 2.5% - good going considered the relatively subdued global economy.
While the US lost 8 million jobs in the Great Recession, since then it has added over 13 million. This pace will accelerate in 2016.
A stronger dollar (which will smash through parity with the Euro) and the ongoing decimation of emerging/commodity currencies, will lead to a further rise in the value of the world’s reserve currency versus everyone else’s.
The continued divergence of interest rate policy between the US and its major trading partners (particularly the Eurozone - which will expand Quantitative Easing in 2016) will feed into continued dollar strength.
While internationally focused US companies will struggle to increase their profits, the low oil price and growing internal demand will keep the domestic economy growing strongly.
People often forget that the US economy is overwhelming domestically orientated – exports make up less than 15% of GDP (in comparison Ireland is over 100%) – this means that the fallout from weak growth in Europe and the slow motion collapse taking place in China, Russia and Brazil is limited.
The stock market will be volatile in 2016 – as it always is in an election year. The potential for a crash in the junk bond market will also weigh heavily on investors. Resource companies globally have borrowed over 1 Trillion USD and many will have difficulties with their repayment schedule in 2016 (some high yield funds are already gating investors).
American labor costs will finally begin to escalate as the pool of available employees dries up. This will help mitigate some of the outrageous wealth inequality that currently exists in the country and has occurred from time to time in its history (the "Robber Barons" of the 1890’s & gross inequality of the “Roaring ‘20s”). Nonetheless the scourge of inequality will continue to be a major demand thorn in the side of the US economy and arguably is the key threat to American prosperity in the years ahead.
Geo-politically - despite the jangled nerves and fear of potential terrorist attack - the US remains relatively insulated from the instability taking place across the world.
Though Americans may not feel like they are basking in a warm economic glow, compared to the rest of the world their economy is on fire.
- Incremental European recovery
Historically the US has always lifted the global economy out of recession (1920’s, Post WW2, Post-Soviet collapse etc.) and this time will be no different.
However the process will be a lot slower than in the past and improvements in its major trading partners, such as Europe and Asia, will be incremental at best.
The European economy is gradually starting to expand after years in the doldrums. While this pattern will continue in 2016 it will take place against a continued background of crushing sovereign debt, geo-political instability and the disgraceful scourge of mass youth unemployment.
The good news for Europe is that the combination of a super weak currency (potentially reaching its lowest ever in 2016), rock bottom oil prices, export demand from the US and the ongoing massive monetary easing at the ECB, will start to have an impact on European economic growth.
This will all take time. Unfortunately Europe’s migration crisis will continue in 2016, as will the spectre of terrorist attacks across the continent. This is fuelling political extremism, as can be seen in the far right populist governments of Hungry and now Poland (not to mention recent elections in France).
Greece will limp through 2016 now that its ejection from the Euro has been hibernated (Germany wants its money back in Euros, not Drachmas). From here the focus will likely move to Italy – the source of the next great potential crisis in the Eurozone. Italy's economy is now smaller in real terms than when it joined the Euro 15 years ago and its sovereign debt is close to unmanageable. Smaller banks are already collapsing and the window of opportunity for economic reform is closing.
On a positive note continued progress at the peace talks in Cyprus substantially raise the prospect of a deal in 2016, to reunite the island in a bi-zonal federation and bring to an end Europe’s last divided capital.
The UK was the fastest growing G7 economy in both 2014 & 2015. The economy will continue to grow in 2016, albeit at a slower pace, particularly as tensions and uncertainty mount over its forthcoming referendum on whether to commit economic "Hari Kari" and leave the European Union, dampening investment and increasing economic volatility.
Neighboring Ireland continues to attract more US investment than all the BRIC countries combined and in 2016 will remain the fastest growing developed economy in the world.
- BRICs go bust
Most of fabled “BRIC” countries are in such a mess it’s hard to know where to start.
2016 will continue to be a nightmare year for Brazil – the economy contracted by 5% in 2015 and next year won’t be much better. Brazil – like most of the other BRICs (Russia, China etc.) – missed the opportunity to reform its economy during the good times and is now paying the price.
Brazil’s commodity exports are at record lows and there will be no relief next year. Inflation will top 10% and lead to growing unemployment, a likely downgrade to Junk status and instability across the country – despite the Olympics taking place in Rio next summer.
The Brazilian president may well be successfully impeached and removed from power, thrusting the country into a period of prolonged economic uncertainty. Its exchange rate will continue to nosedive – just as it will for other commodity economies – South Africa, Russia, Australia and Canada etc.
Russia is a basket case. Huge spending on military hardware in an attempt to stem its decline in the Middle East is causing budgetary headaches for the government. The Rouble will continue its march towards a 3 figure exchange rate.
Tension with nearly all its neighbors (Europe, Turkey, Middle East, US etc.) will keep the economy mired in recession and the continued price collapse of its key commodity exports will put pressure on Vladimir Putin – who will respond as he always does - by banging the nationalist drum and kicking up trouble on his borders (most likely next in Moldova). This should be enough to ensure he maintains his position (if not his popularity).
In 2016 China’s growth figures will be exposed for what they are – absolute fabrication.
The government will no longer be able to maintain the pretense the economy is growing at 7% annually - when all other economic indicators point to an economy struggling to maintain 3% growth.
The policy of cutting interest rates and pegging its currency lower and lower will continue – in a vain attempt to kick start the economy and move it from government led investment to domestic driven consumption. It won’t work.
What it will do is prompt a spike in inflation, which is a key concern for the Communist Party and was a major factor in the Tiananmen Square demonstrations 25 years ago.
China’s stock market is still laughably overvalued (760 PE ratio fan makers anyone?) and its senior officials bumbling response to the Summer of 2015 stock market crash won’t provide much comfort going into 2016 – particularly for its nearly 100 million domestic retail share investors.
We strongly believe the Chinese economy is heading for a massive crash over the next few years due to the "Unholy Trinity" of financial headaches - a simultaneously collapsing Equity Bubble, Property Bubble and Credit Bubble.
Throughout two centuries of modern economic history this combination has never ended well. We don't see any reason why China will be any different.
Japan will limp along as it has for the last 25 years, seemingly unable to rid its economy fully of deflation, as it struggles with low growth and the world’s oldest population. 2016 will see another dose of “Abenomics” to try and kick start the economy but will fail to catch fire, largely due to a weak global economy, existing debt and horrible domestic demographics.
South Africa is on the verge of a major financial meltdown. Though the country won’t be cut to junk status for year or two, once this happens its government debt (which has doubled under Zuma) will quickly become unmanageable and the IMF will be called in to restructure the economy. By then the Rand will have reached 20 to the USD and the country will no longer be the major driver of African economic growth.
- Chaos across the “Arc of instability”
The “World Island” – Europe/Asia/Africa - is suffering one of its periodic phases of mass upheaval.
Regimes and countries which survived the Post-war period and the recent decades since the Soviet collapse are been brushed aside. What will replace them is not yet clear.
Huge tracts of the Middle East, North Africa and Asia – a vast “Arc of Instability” - resembles a Mad Max dystopian nightmare - religious fundamentalists roaming the land, armed to the teeth with modern military hardware and financed by their captured oil resources.
To make matters worse many fairly stable but potentially volatile countries in the region depend heavily on commodities for their economic growth and government revenue.
While the long term demand for major energy, metal and food commodities remains intact (fuelled by a global birth rate now in excess of 350,000 per day) there won’t be any relief for commodity producers in 2016.
Both oil and iron ore are down over 75% on their highs and will go lower in 2016. A sub-$30 oil price is coming and it will have major geographical upheavals in 2016 across the developing world.
The US participation in this region is becoming limited. America now looks at the Middle East through the prism of domestic security – not energy security.
Opportunities in Iran - as it comes in from the economic cold - will lead to a minor economic boom there (as in Burma/Myanmar) but this in turn will continue to hold down the Oil price, particularly as OPEC seems intent on destroying itself.
The frozen conflict in Ukraine will remain just that and the West will allow Russia considerable leeway in return for playing ball in the Syrian quagmire.
Turkey will continue to be the lynchpin in the region. The country had tripled the size of its economy this century and is resuming the traditional power role it held for 2,000 years straddling the axis of Europe and Asia, particularly as its key competitors in the region (Saudi Arabia & Iran) are distracted fighting a proxy Islamic Sunni/Shia civil war.
Syria will continue to be the most hellish part of the planet in 2016, with the best that can be hoped for is that the multiple overlapping forces fight themselves to a standstill. Unfortunately - as we have learned in the Middle East – bad governments have a tendency to get replaced with something much worse. There is no easy answers here – only outcomes.
The avalanche of Syrian refuges trying to reach Europe to escape slaughter and civil unrest, is set to continue next year (unless the EU can persuade Turkey to maintain control of its borders). The EU would do well to heed the lesson of history - the Roman Empire collapsed because of its inability to respond to massive waves of refugees fleeing conflict in the East. With another 1 million refugees likely to reach Europe next year the continents post-war quasi-federal project will remain massively strained in 2016.
Elsewhere China’s slowdown will continue to be keenly felt by a plethora of developing and commodity oriented economies that have come to depend on China’s expansion to drive their own economic growth (e.g. Parts of Africa, Australia, New Zealand, Russia etc.).
Australia, Canada and New Zealand will all try and rebalance their economies away from commodities - with varying degrees of success. Legacy debt and some of the highest property prices in the world will continue to loom large, as domestic banks scurry to raise more capital and sell off overseas assets, ahead of the inevitable property crisis.
The commodity collapse will also impact Africa but by less than many observers think. By far the youngest continent in the world, Africa is shaping up for a massive "demographic dividend" in the years ahead. The continent still has much catching up to do but some of its key Sub-Saharan economies (Nigeria, Ethiopia, Kenya) are growing quickly, as their domestic economies expand. Unfortunately turmoil in the north of the continent and potentially genocidal tension around the Great Lakes (particularly in Burundi) could act as brakes on economic growth.
- India - the fastest growing major economy in 2016
India is the odd man out of the BRIC economies, but for all the right reasons.
Long overshadowed by China’s growth rate, India will enjoy a stellar 2016.
Its economy will grow by over 7% next year – by far the highest of any major economy and finally overtaking China’s (artificial) growth rate.
Unlike China, India already had its economic crisis 2 years ago and the currency and economy has made a strong recovery. The Indian Rupee may turn out to be the only major currency to appreciate versus the US Dollar in 2016.
A new government elected with a strong mandate for reform, India is also a major beneficiary of the low oil price and lower interest rate for investment and growth. The countries demographic profile will be a major boon to its growth rate in the years ahead and this will start to be felt in 2016.
The challenge for the country is to address the infrastructural and bureaucratic strangleholds that have traditionally held back economic growth, while also addressing the pockets of extreme poverty that still exist in the country. Recent initiatives like opening bank account for 75 million poor Indians are a step in the right direction.
Conclusion
Broadly 2016 will be a positive one for the Global Economy.
The slow recovery from 2008 will continue and despite some turbulence in emerging markets and volatility in the commodity and foreign exchange markets, the pace of economic expansion will escalate in much of the developed world.