The economic outlook for 2016
6 January 2016
What can we expect in 2016 from the world economy? If the mainstream forecasters are right slightly better than last year. The International Monetary Fund, for example, forecasts growth of 3.6% this year after 3.1% in 2015. Last year's figure is rather sluggish; this year's stronger but still not all that impressive. The IMF will produce an updated forecast later this month, but in a guest article for the German newspaper Handelsblatt, the agency's managing director, Christine Lagarde, warned that this year will be disappointing. The recovery from the Great Recession, which followed the international financial crisis, continues. It's just not very convincing. This is just a forecast of course and like all such exercises it's surrounded by a cloud of uncertainty. So what are the big issues for next year, the factors that will determine whether things turn out better or worse than the IMF and others currently predict? Once again, two factors dominate, and they come from the world's two largest economies: the United States and China. In the US the long haul back to a more normal interest rate policy began at the end of last year. The Federal Reserve finally raised its main interest rate target from the level of practically zero it has had since the end of 2008. There is certainly the potential for that to cause significant disruption to emerging economies. It's likely to lead to higher borrowing costs, and lower currencies, because money will be moved to the US to benefit from the rising interest rates there.   That in turn will make it more expensive to repay loans in dollars. All this has already happened to some extent as financial markets moved in anticipation of the Fed's action. So far, there has been no emerging markets financial crisis. It could well stay that way, though there are certainly risks of turbulence. Might we be looking at a new wave of emerging market crises like that of the 1990s and 2000s, which swept through East Asia, Latin America, Turkey and Russia? Prof Carmen Reinhart of Harvard has expressed some concern. She wrote in October: "Though emerging economies' debts seem largely moderate by historic standards, it is likely that they are being underestimated, perhaps by a large margin. If so, the magnitude of the ongoing reversal in capital flows... may be larger than is generally believed - potentially large enough to trigger a crisis." Then again, Nouriel Roubini, who made a name for himself by warning about the global crisis, argued that "widespread distress and crises need not occur". Many economists accept that emerging economies have improved their economic policy dramatically in recent years and are better able to withstand international financial storms today. Nonetheless some do face serious problems for other reasons, which can only be aggravated by financial market turbulence, for example, Russia due to the lower price of crude oil, Brazil due to a domestic political crisis, while Venezuela has both types of problem. The other big issue is China's slowing economic growth. It could not have been sustained indefinitely at the annual average of 10% that the official data shows for the 30 years up to 2010. Throughout the slowdown, which began around the start of the current decade, the question has been: will it be a smooth transition or not, a hard or soft landing? So far, no crisis, though there have been some sharp stock market falls in China. There were several weeks of volatility in the middle of 2015 and trading for this year got off to an inauspicious start, with a fall of 7% in Shanghai and trading suspended. One of the reasons for those latest falls was data pointing to a decline in manufacturing activity in December, more evidence in other words of the economy shifting down a gear. China's slowdown has been a central factor in another development: the recent falls in global commodity prices - oil, metals and foods. China is not the only factor, especially in the oil market, but it's an important one for many commodities. The price fall has been good news for some countries. Cheap oil in particular is often likened to a tax cut for consumers. But it is equally bad news for countries that make a living exporting these items - soya from Argentina, oil from Saudi Arabia and copper from Zambia, for example. Oil prices have not rebounded during the course of 2015 as some analysts thought they might. In fact oil is now even cheaper than it was a year ago, and it's now about two-thirds down from the level it reached in June 2014. Prof Kenneth Rogoff, also of Harvard and a former IMF chief economist, says the beneficial effect of cheaper oil for global growth has been rather "muted" this time, in part because some countries are using it as an opportunity to cut subsidies rather than allowing consumers to get the full benefit. The broad picture since the financial crisis is that the rich countries have been through a slow and incomplete economic recuperation.  Some are further into this process (the US, the UK) than others (the eurozone). For the emerging economies, growth has slowed every year since 2010. It is still faster than the rich countries, but this slowdown has raised a question posed by the World Bank: is this group experiencing a rough patch or prolonged weakness? The IMF predicts that growth for emerging and developing economies will pick up this year, from 4.0% to 4.5%. Still, the World Bank identifies a number of reasons for concern that they might be in for a more protracted period of relatively disappointing performance.
Once again, two factors dominate, and they come from the world's two largest economies: the United States and China. In the US the long haul back to a more normal interest rate policy began at the end of last year. The Federal Reserve finally raised its main interest rate target from the level of practically zero it has had since the end of 2008. There is certainly the potential for that to cause significant disruption to emerging economies. It's likely to lead to higher borrowing costs, and lower currencies, because money will be moved to the US to benefit from the rising interest rates there.   That in turn will make it more expensive to repay loans in dollars. All this has already happened to some extent as financial markets moved in anticipation of the Fed's action. So far, there has been no emerging markets financial crisis. It could well stay that way, though there are certainly risks of turbulence.
498_0
Disruption from higher US rates?
The broad picture since the financial crisis is that the rich countries have been through a slow and incomplete economic recuperation.  Some are further into this process (the US, the UK) than others (the eurozone). For the emerging economies, growth has slowed every year since 2010. It is still faster than the rich countries, but this slowdown has raised a question posed by the World Bank: is this group experiencing a rough patch or prolonged weakness? The IMF predicts that growth for emerging and developing economies will pick up this year, from 4.0% to 4.5%. Still, the World Bank identifies a number of reasons for concern that they might be in for a more protracted period of relatively disappointing performance.
498_1
Rough patch for emerging economies?