The world economy next year is shaping up to be stronger than in 2015 and roughly in line with long-term growth averages, according to the International Monetary Fund and economists surveyed by Bloomberg. But “a return to robust and synchronized global expansion remains elusive,” the IMF said in its October outlook. The fund’s economists project world growth of 3.6 percent, up from 3.1 percent this year and about the same as the 3.5 percent average from 1980 through 2014. Those numbers are based on the IMF’s preferred method of measuring output, using the real purchasing power of national currencies. Measured the standard way—using market exchange rates—the IMF’s projections and historical figures would be about 0.6 percentage point lower.
The coming year will be “OK-ish,” says Adair Turner, former chairman of the U.K.’s Financial Services Authority and author of a new book, Between Debt and the Devil. More pessimistic than the consensus, he worries there will be undeclared currency wars as Europe and Japan try to cheapen their money to boost exports and employment at home—essentially stealing growth from their trading partners.
Here’s the mainstream outlook in a nutshell: China will continue to decelerate. The U.S. will continue to outperform its rich-nation peers. With global demand soft, the price of money (interest rates) and the prices of oil and other commodities are likely to remain low. Central bankers Janet Yellen, Mario Draghi, and Haruhiko Kuroda will be in the spotlight as the Federal Reserve attempts to nudge rates higher and the European Central Bank and Bank of Japan look for ways to stimulate growth.
The most important variable for 2016 is China, where the annual gross domestic product growth rate dipped below 7 percent in the third quarter of 2015 for the first time since the 2008-09 financial crisis. Developing nations that have come to depend heavily on China as a customer for their resources include Brazil, Chile, Indonesia, Malaysia, the Philippines, South Africa, Thailand, and Vietnam. But the world’s appetite for Chinese goods isn’t growing at the same pace anymore, and China has no urgent need for more of the infrastructure it’s been furiously building. Like his predecessors, President Xi Jinping is having a tough time guiding the economy toward domestic consumption as a new source of growth. “China finds itself in a particularly tricky starting position,” Louise Keely, president of the Demand Institute, a venture of Nielsen and the Conference Board, wrote in an August blog post.
The IMF projects that China’s growth will slow to 6.3 percent in 2016, from 6.8 percent this year. That’s tolerable, albeit seemingly below the “medium-high” growth the country’s leaders said again in October that they want. More pessimistic is Willem Buiter, chief global economist of Citigroup. “We consider China to be at high and rapidly rising risk of a cyclical hard landing,” he wrote in September, citing excess capacity and high debt loads. With Russia and Brazil already in recession, a sharp slowdown in China would drag other emerging markets down, Buiter warned. Most rich nations depend less on exports to China, so they “will not experience recessions themselves but will merely grow more slowly,” he wrote.
Cheap oil is one key factor that makes most economists more optimistic than Buiter. While the low price harms exporters, including Russia and members of OPEC, it boosts importing nations in the developing world—most of Latin America, Africa, and Asia, including China. Cheap oil also helps developed nations such as the U.S., but fuel costs are a smaller portion of their total expenditures.
Unfortunately for macroeconomists, oil prices are even less predictable than the Chinese economy, depending on everything from OPEC politics to strife in the Middle East. One theory says the price of crude could drop below $40 a barrel next year, because production is exceeding consumption and the world is running out of places to store the excess. An unprecedented amount of crude is afloat on tanker ships while its owners look for buyers. Oil bulls counter that the low price will depress exploration and production enough to create shortages and drive the price back up. Emad Mostaque, a strategist for Eclectic Strategy in London, says a barrel of oil could fetch $100 or even $130 by 2017. Between those two extremes, traders are betting that prices will rise only a bit, with the Brent crude benchmark reaching $56 a barrel by the end of 2016, up from about $49 now.
For the U.S., 2015 was supposed to be the year the economy was finally healthy enough to get off the life support of near-zero interest rates. Yet the Federal Reserve has pushed off its first hike in the federal funds rate to the very end of the year—Dec. 16—at the earliest. March 2016 is looking more likely. There’s even a slim chance that it will delay liftoff past the end of 2016.
Judging from the misery index, which combines the latest reported inflation rate and unemployment rate and was 5.1 percent in October, the U.S. economy is as good as it’s been since the 1950s. But if the misery index is this low, why are so many people miserable? One big reason is that wages haven’t risen as much as they usually do when the jobless rate is this low. According to Sentier Research, median household income in September was 1.7 percent lower than in January 2000 after adjusting for inflation. Wages are expected to grow a bit faster in 2016.
The upside of America’s slow growth is that the economy is way short of inflationary overheating, so there’s no need for the Fed to jack up rates rapidly and potentially kill the expansion. “Recessions come out of excess,” says Liz Ann Sonders, chief investment strategist at Charles Schwab. “We’re still in recovery mode. We’re not even in expansion mode.”
Strength in consumer spending could embolden businesses to invest to upgrade plants, equipment, and software. The updates are overdue. “If anything, both consumption and investment have been too weak throughout this expansion,” Deutsche Bank Chief Economist Torsten Slok wrote to clients in October. “As a result, I continue to believe that we are several years away from the next recession.”
Europe and Japan are weaker. Unlike the U.S. economy, which has grown slowly but steadily since 2009, both have suffered periodic setbacks. The ECB could push short-term interest rates deeper into negative territory even before 2016 starts, and the Bank of Japan is getting ready to increase bond purchases to lower long-term rates.
The Greek financial crisis, out of the headlines now, could wind up back on Page 1 by late 2016 if Prime Minister Alexis Tsipras can’t win approval for the spending cuts, tax hikes, labor-market reforms, and privatizations that creditors have demanded. After observing the Greek tragedy from afar, British citizens are glad they kept their pound sterling. Next October they’ll go to the polls for a referendum on a more radical step: leaving the EU entirely. An “out” vote “would seriously undermine business confidence in Europe,” says Russ Koesterich, global chief investment strategist for BlackRock, the big asset manager.
Europe’s refugee crisis is a fresh stress on the EU. The strange thing is that it may stimulate short-term economic growth, at least in Germany. “We think it will be a boost for GDP,” says Malte Rieth, head of global economic forecasting at the German Institute for Economic Research in Berlin. The organization, known by its German acronym DIW, calculates that the government will give aid to the refugees, who in turn will spend it, mostly on domestic goods and services, adding 0.1 percent to 0.2 percent of GDP growth.
Developing nations are watching the Federal Reserve, concerned that investors will yank money away from them and invest it in the U.S. when the Fed hikes rates. The fears are probably misplaced. Investors have had at least two years to move their money around. “Surely few would be taken by complete surprise when the FOMC [Federal Open Market Committee] finally gets on with the job of raising interest rates, probably in March,” economists at Capital Economics wrote in October.
It’s been a hellacious year for Brazil (political crisis, oil) and Russia (sanctions, oil). The IMF is expecting both countries’ economies to continue shrinking in 2016, but not as rapidly. No other major economies are expected to be in recession next year. The IMF looks for India to outpace China again, accelerating slightly to 7.5 percent growth, while Mexico grows 2.8 percent, Nigeria expands 4.3 percent, and South Africa manages a bare 1.3 percent increase in output.
OK-ish growth might just be as good as it gets from here on, says Stephen King, senior economic adviser to HSBC in London. He argues that the strong world growth of 1950 to 2000 was an anomaly and says the world economy is returning to the slower pace of the preceding 150 years. In other words, it’s not just a matter of applying the right stimulus here and there. “The problem,” King says, “is deeper.”
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