For global financial markets, the opening days of 2016 played out like a reprise of the worst moments of 2015. China’s overvalued stockmarkets tumbled, exacerbated by misguided government intervention. Data showing soaring stocks and concerns about plentiful supply sent oil prices down to multi-year lows. Confidence was lost around the world, with an estimated US$3.2trn wiped off the value of stocks, according to S&P Dow Jones. Consequently, The Economist Intelligence Unit expects many of the trends evident in 2015 to be repeated this year.
We are not especially worried about the volatility in Chinese stockmarkets. The link between equities and the real economy is tenuous, and exchanges remain immature compared with their equivalents in Europe and the US. Nevertheless, the government’s response has been frustrating. Shutting down trading showed the government to be less trusting of market forces than we had hoped, and its attempt to put a floor under prices using so-called circuit breakers had the opposite effect.
We are more concerned about the performance of the renminbi, which has depreciated since the government permitted greater market influence over the setting of its reference rate. From Rmb6.11:US$1 in August, the currency was trading at Rmb6.56:US$1 in early January, and in December alone the People’s Bank of China (the central bank) spent US$108bn in foreign-exchange reserves to arrest a steeper decline. This month we have made modest downward revisions to our forecast for the Chinese currency in 2016‑19. We have three concerns about the renminbi weakening faster than this: that it will encourage a huge wave of capital out of China; that it will lead to a shock maxi-devaluation, of 20% or more; and that it will put further downward pressure on a host of already weakened emerging-market currencies. None of these are our central forecast, but all have the potential to disrupt the real economy.
Together with China, the resumption of falling oil prices contributed to the gloomy feel of the new year. Although the planks of our oil outlook remain the same, we have cut our price forecast for the second consecutive month to reflect the eagerness with which investors have sold oil in recent weeks and the lifting of US sanctions on Iran on January 16th. Oil is already in a supply glut owing to the technological advances of US shale and OPEC’s decision to protect market share rather than shore up prices by cutting output. The promise of new production from within OPEC, primarily from Iran, will keep prices extremely low in the first half of 2016. In addition, the strong demand growth experienced in 2015 will dissipate as transitory price- and weather-related factors are not repeated. Opportunistic buying will also fade as a source of demand; oil stockpiles are at their highest level on record. This means further pain for the producers, from Canada to Venezuela, that suffered in 2015, and more disposable income for consumers in oil importers such as India, Turkey, Germany and the US. We do not believe that global oil prices are sustainable at current levels; supply cuts will cause the market to tighten from the second half of 2016, lending some support to prices.
Our aggregate forecasts show that real GDP growth at market exchange rates will accelerate marginally in 2016, to 2.6%, from an estimated 2.4% in 2015. This year there will be stronger contributions from emerging Asia and from Iran, and a milder contraction in Russia. In 2017‑18 China will contribute less of the new output added each year, but this will be offset by improving performances in other emerging markets. A business-cycle recession in the US in 2019 will slow growth in that year. The role of the US as a net importer with the rest of the world means that we expect a poor 12 months across the world in that year. A swift US recovery will give some impetus to growth in 2020.
We forecast that the US economy will grow by 2.4% in 2016, the same as our estimate for 2015. This outlook is shaped by three trends. First, strong private consumption—supported by healthy job growth, higher real wages and house price gains—means that confident consumers will power the economy. Second, the strong dollar will reduce demand for US exports. Third, low oil prices will continue to curtail investment in the energy sector. Thereafter, private consumption growth will slow slightly as the Federal Reserve (Fed, the US central bank) tightens monetary policy, but a continuation of the housing market recovery will increase household wealth. A slow increase in oil prices will support a rebound in business investment, and government spending is also set to rise.
In Europe the focus has shifted from the economy to problems with borders, sovereignty and security. Elements of EU integration—notably the borderless Schengen area—are under profound strain. The EU appears to be moving slowly towards a less uniform set of relations between its member states, in which opt-outs play a greater role. We estimate that the euro zone grew by 1.5% in 2015 as lower oil prices and a modest recovery in bank lending boosted demand. The European Central Bank will continue with its policy of quantitative easing, which we expect to support annual average growth of 1.6% in 2016‑17.
Japan is also struggling for consistent economic growth, despite emergency monetary policy settings. The economy returned to growth in July-September, but core consumer prices are once again hovering around zero, owing to the deflationary effect of falling oil prices. Recent surveys of business confidence contain encouraging signs, and wages should rise again in 2016. Preparations for the 2020 Olympic Games in Tokyo will also be supportive for investment. But these trends will be countered by the ongoing fall in the working-age population and the rising old-age dependency ratio.
The structural slowdown in Chinese growth will continue in 2016 and beyond. The government has set a new annual growth target of 6.5% for the next five years, which we believe will be difficult to achieve without some creative accounting. The economy is now running at two different speeds, with the manufacturing sector growing by 1.2% in nominal terms in January-September 2015 and services expanding by 11.6%. This is bad news for economies built on Chinese import demand. In India lower oil prices have eased structural problems with high inflation and enabled looser monetary policy. Growth should remain steady, averaging 7.3% a year in 2016‑20, but the measures that could see it reach double digits again—land acquisition reforms and a nationwide goods and services tax—will prove hard to legislate.
We estimate that the Transition region contracted by 0.6% in 2015, as an acceleration in East-central Europe was cancelled out by Russia, by far the region’s largest economy, which has suffered a deep recession. An improvement in that economy will permit a return to regional growth in 2016, but only by 0.8%. Cheap oil and EU sanctions, which have been extended to mid‑2016, will continue to dog Russia. Elsewhere, there is wide divergence: East-central Europe is benefiting from improved credit conditions and greater demand from the EU, but Commonwealth of Independent States economies are suffering from weaker trade and remittances as a result of the Russian recession.
The malaise affecting Latin America will continue for a third year in 2016. The underperformance is being driven by Brazil, where GDP shrank by 3.7% and is forecast to fall again, by 2.7%, in 2016. Poor policy management and corruption scandals have eroded investor confidence and left the economy ill-equipped to withstand the impact of worsening terms of trade. A weak currency is stoking inflation, which is forcing the central bank to keep interest rates high, and the government needs to implement a pro-cyclical tightening of fiscal policy to contain a wide budget deficit. Even better-performing countries, such as Peru and Colombia, are struggling with a downturn in the credit cycle. The region is highly exposed to rising US interest rates: Mexico, Chile, Colombia and Peru are now engaged in tightening cycles in sync with the Fed.
The instability that was precipitated by the 2011 Arab Spring will continue to spread social unrest, war and terrorism in the Middle East and North Africa. The region’s problems have increasingly spilled over its borders, exemplified by the flood of refugees into the EU, the global threat posed by Islamic State (IS) and deteriorating relations between Iran and Saudi Arabia. Cheaper oil means that even countries with large sovereign wealth funds, such as Saudi Arabia, are having to cut spending to contain ballooning budget deficits. The region’s non-oil economies have received a boost, and this, coupled with a buoyant economic performance in Iran, will enable regional GDP growth to accelerate from an estimated 2% in 2015 to 4% a year on average in 2017‑20.
Sluggish growth in South Africa, Nigeria and Angola, and a deceleration in some of the previously dynamic regions will continue to depress Sub-Saharan African growth in 2016. At around 3%, GDP growth in 2016 will be at the third-slowest rate since 2000. A less supportive external environment, including generally weak commodity prices and much reduced international liquidity amid rising interest rates in the US, will continue to expose the structural flaws that plague many African economies. Better external prospects and domestic policy improvements will support gradually stronger growth rates from 2017.
We expect the US dollar to remain strong against the major currencies in 2016, supported by the divergence in monetary policy with the euro zone and Japan. Any further appreciation of the dollar will be mild, following its big move up in 2014‑15. Both the euro and the yen gain structural support from current-account surpluses, and we expect them to strengthen against the dollar as the monetary stances of their central banks tighten. Emerging-market currencies will remain vulnerable until there is a sustained improvement in economic performance, which we do not expect for another year at least.
We do not expect crude oil prices to bounce back to pre‑2014 levels in the next five years, as modest demand growth will fail to catch up with resilient supply. Despite a dip in US production in 2016, global crude supply will expand further on the back of continued output growth from OPEC and, to a lesser extent, Russia. Combined with moderating demand growth, this points towards only a gradual increase in prices. Industrial metals prices will recover slowly in the remainder of the decade. The arrival of an El Niño phenomenon means that some food prices will rise quickly (from low bases) in the coming months.
|World economy: Forecast summary|
|Real GDP growth (%)|
|World (PPP* exchange rates)||4.0||3.3||3.3||3.4||3.1||3.3||3.7||3.8||3.4||3.6|
|World (market exchange rates)||2.9||2.2||2.2||2.5||2.4||2.6||2.8||2.9||2.5||2.8|
|Asia and Australasia (excl Japan)||6.6||5.6||5.7||5.8||5.4||5.4||5.2||5.2||4.7||4.6|
|Middle East & Africa||3.4||3.8||1.8||2.4||2.0||2.6||3.5||4||4.1||4.2|
|World inflation (%; av)||4.9||4.0||3.9||3.6||3.3||3.7||3.6||3.4||3.1||3.2|
|World trade growth (%)||7.2||2.9||3.4||3.2||2.3||2.9||4.1||4.3||3.5||4.0|
|Oil (US$/barrel; Brent)||110.9||112.0||108.9||98.9||52.4||42.9||60.0||73.6||72.8||71.4|
|Industrial raw materials (US$; % change)||21.8||-19.3||-6.9||-5.1||-15.0||-3.8||13.3||4.8||-2.6||-1.3|
|Food, feedstuffs & beverages (US$; % change)||30.0||-3.5||-7.4||-5.2||-18.7||-0.8||7.7||4.8||0.0||-0.8|
|Exchange rates (av)|
|*PPP=purchasing power parity|
|Source: The Economist Intelligence Unit.|