For investors around the world, 2015 seems to be a bad year. After three years of rising share prices and unprecedented quantitative easing, markets are now dipping as emerging markets from BRIC (Brazil, Russia, India and China) wanes further. Global demand is likely to soften further where China and other emerging economies will continue to decelerate. The ECB and Bank of Japan will continue looking for ways to stimulate growth. Interest rates are expected to increase but in a gradual manner, allowing U.S. to continue outperforming. With the Trans-Pacific Partnership (TPP) winning approvals from twelve nations that together accounts for almost 40 percent of global output, economists from IMF have projected a world growth of 3.6 percent, up from 3.1 percent this year.
China has been the biggest source of anxiety for investors when the country’s worst economic slowdown from 1990 seems to be deepening. Being the world’s largest consumer of commodities, a subtle shift of weight, a lowering of hands or a glance, is enough to set off a chain of events. Upon unexpected devaluations in August to make the yuan more market-oriented, the IMF on Monday (Nov 30) welcomed China’s yuan into its benchmark currency basket, finally giving recognition to the rising Asian power in the global economy. It is expected that from this point on, China would provide more transparency with regards to their capital account and banking sector so that it can be more aligned with its peers such as the Federal Reserve or the ECB. Market reforms will be slower as they move away from export-led growth to rely on stronger consumer spending.
In a world that has come to rely on China to keep the global economy ticking, a faltering China could easily tip the world, especially emerging economies back into recession. Asia’s growth is currently running at a 15-year low (Wong 2015) while Latin America’s largest economy on Tuesday (Dec 1) contracted 1.7% in third quarter, pulling the nation into deeper recession as unemployment rises and higher inflation withers demand. Willem Buiter, chief global economist of Citigroup has warned that, with Russia and Brazil already in recession, a sharp slowdown in China would only drag other emerging markets down. A rise in interest rates would only prompt investors to pull money out of emerging markets, plunging them deeper into a vicious cycle that would be difficult to get out of. It is definitely not unlikely to see Russia and Brazil continue shrinking in 2016. To make matters worse, political strife in the Middle East and OPEC countries could make oil prices even more unpredictable. While cheaper oil prices offer an excellent economic boost to importing nations of the world – most of Latin America, Africa, and Asia including China, prices of oil and other commodities are expected to remain low as global demand softens further.
In the Eurozone and Japan, it seems that their economies remains in weak health. Unemployment in Europe is still above 11%, nearly doubled that of the United States. Even a recovering Spain has reported a worrying high unemployment of 22.5% in June 2015. The ECB and BOJ’s quantitative easing efforts to buy bonds is expected to stimulate growth as long-term rates are suppressed further. More spending from consumers and investments are expected thereby creating employment and more goods and services. 2016 would likely see a further weakening of the euro dollar and Japanese Yen causing exports to become more competitive to stimulate growth. While a weakened currency may seem like a bright spot to drive up domestic demand, Europe and Japan have to maintain a balance as cheapening their currency too much may essentially be stealing growth from their trading partners. A currency war is pretty much the last thing everyone wants to see.
Despite the turbulence, the US economy seems to be shaping up quite well. Economic growth in US grew by an annualized 3.7%, up from an estimated 2.3% where this growth was contributed by strong consumer and government spending, and higher exports. If interest rates were to rise by end of the year, 2016 is likely to see the trade deficit widening as the dollar strengthens and imports increase. TPP member countries especially Japan, Malaysia and Vietnam would have the biggest impact as the U.S. currently have free-trade agreements (FTA) with most of the other member countries. Trade barriers would drop for sales of technology and agricultural machinery needed in countries like Malaysia and Vietnam and this could see an improvement in agricultural industry as they become more efficient. Regardless of how much rebound is expected, consumption and investment landscape would certainly be more challenged due to higher interest rates. While unemployment may have declined, real wages have also stagnated.
The market has corrected; both advanced and emerging economies are moving towards the improvement and that takes time. The global economy may shape up to be stronger in 2016, but its growth rate would not be significantly different as compared to recent years. A healthy U.S. economy is likely to continue leading the way, while Europe is ready for expansion from its new program of quantitative easing. Asia for now, will remain as the wild card, especially China.
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