What we said last year 1. US growth will be solid, in the 2.5% 3.0% range. 2. The Eurozone recovery will proceed at a sluggish pace, but UK growth will be robust. 3. Japan’s economy will regain weak momentum. 4. China’s economy will decelerate more, but remain stronger than most. 5. A few emerging markets will struggle, while many will see aboveaverage growth 6. Commodity prices will slide further. 7. Inflation will be a distant threat, while deflationary worries persist.
DECEMBER 10, 2015 TOP-10 ECONOMIC PREDICTIONS FOR 2016 Nariman Behravesh, Chief Economist +1 781 301 9101 nariman.behravesh@ihs.com © 2015 IHS ALL RIGHTS RESERVED Top-10 Economic Predictions for 2016 What we said last year US growth will be solid, in the 2.5% - 3.0% range The Eurozone recovery will proceed at a sluggish pace, but UK growth will be robust Japan’s economy will regain weak momentum China’s economy will decelerate more, but remain stronger than most A few emerging markets will struggle, while many will see above-average growth Commodity prices will slide further Inflation will be a distant threat, while deflationary worries persist The Federal Reserve, Bank of Canada and Bank of England will likely start raising interest rates, while other central banks will be on hold or provide more stimulus The dollar will rise against most currencies, while the euro and the yen will fall 10 Perennial downside risks will be balance by some upside risks © 2015 IHS Top-10 Economic Predictions for 2016 Introduction • Since 2011 global growth has been range-bound between 2.5% and 2.7%—well below the average growth rates of the past two decades • A gradual acceleration in the developed world has been offset by a sharp deceleration in the emerging world • There is likely to be a small acceleration in global growth from 2.6% in 2015 to 2.9% in 2016, thanks to solid growth in the US, a slight acceleration Eurozone and Japanese growth and an easing of recessionary pressures in Brazil and Russia • Low commodity prices and more monetary stimulus from the European Central Bank, Bank of Japan, and People’s Bank of China will also support growth • Unfortunately, there is no shortage of risks • This means that the risk of the global economy being stuck in low gear through 2016 is uncomfortably high © 2015 IHS Top-10 Economic Predictions for 2016 Global real GDP growth: range bound Real GDP 10 Percent change -2 -4 1990 1993 1996 World Source: IHS © 2015 IHS 1999 2002 2005 Advanced countries 2008 2011 2014 2017 2020 Emerging markets © 2015 IHS Top-10 Economic Predictions for 2016 Why have global economic growth and productivity growth disappointed? Supply constraints Demand constraints â 2015 IHS • Diminishing labor force growth Low investment rates Slow diffusion of technological advances Lack of market reforms • • • • Private-sector deleveraging of debt Slower growth of world trade Excess capacity in resource industries Limited scope for policy stimulus Top-10 Economic Predictions for 2016 Real GDP growth in the United States, Eurozone, and Japan Real GDP Percent change -2 -4 -6 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 United States Source: IHS © 2015 IHS Eurozone Japan © 2015 IHS Top-10 Economic Predictions for 2016 Real GDP growth in key emerging markets: Recessions in Russia and Brazil will continue into 2016 Real GDP 15 Percent change 10 -5 -10 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 China Source: IHS © 2015 IHS India Brazil Russia © 2015 IHS Top-10 Economic Predictions for 2016 US growth will remain solid • Real GDP growth will pick up from 2.5% in 2015 to 2.7% in 2016— thanks, in part, to an end to the inventory cycle • Solid gains in employment, real disposable income, and housing asset values support real consumer spending growth of around 3% • Housing construction will steadily recover in response to rising employment, easing credit, and household formation • Business investment in equipment, software, and commercial structures will post robust growth—while the plunge in energy capital spending will ease • A two-year federal budget agreement and suspension of the debt ceiling reduce policy uncertainty and provide near-term stimulus • Net exports will continue to be a drag on US growth in 2016 © 2015 IHS Top-10 Economic Predictions for 2016 US consumer spending will continue to drive the bulk of economic growth Contribution to real GDP growth Percentage points -1 -2 2012 2013 Real GDP Residential investment Imports Source: IHS © 2015 IHS 2014 2015 Consumer spending Inventories Government 2016 2017 2018 Nonresidential investment Exports Domestic demand © 2015 IHS Top-10 Economic Predictions for 2016 US employment growth has been steadier than real GDP growth during the current expansion Real GDP and employment growth Percent change, annual rate -3 -6 -9 2007 2009 2011 Real GDP Source: IHS © 2015 IHS 2013 2015 2017 Employment © 2015 IHS 10 Top-10 Economic Predictions for 2016 Any rise in inflation will be modest • Inflation in most parts of the world has been kept in check by the nose- dive in commodity prices and by vast amounts of excess industrial capacity • Assuming commodity prices in 2016 are either flat or fall more, this benign state of affairs will continue for a while longer • There are two exceptions to this low inflation picture … • … First, countries that have seen massive declines in their currencies have also suffered higher inflation—Brazil and Russia are cases in point … • … Second, there is a potential for rising wage inflation in countries such as the UK and US, where labor markets have tightened • However, even here, the potential for a sharp rise inflation is limited by residual slack © 2015 IHS 44 Top-10 Economic Predictions for 2016 Consumer price inflation remains subdued in advanced countries Consumer price inflation 10 Percent change 2000 2002 2004 World Source: IHS © 2015 IHS 2006 2008 2010 Advanced countries 2012 2014 2016 2018 2020 Emerging markets © 2015 IHS 45 Top-10 Economic Predictions for 2016 Consumer price inflation varies widely by region Consumer price inflation Annual percent change 20 16 12 NAFTA Source: IHS © 2015 IHS Other Western Emerging Mideast- SubJapan Americas Europe Europe N Africa Saharan Africa 2014 2015 2016 2017 2018-22 Other AsiaPacific © 2015 IHS 46 Top-10 Economic Predictions for 2016 US wage gains will continue to outpace inflation Year-over-year percent change Wages and prices -1 2000 2002 2004 2006 2008 2010 Employment Cost Index, wages & salaries Source: IHS © 2015 IHS 2012 2014 2016 2018 Consumption deflator © 2015 IHS 47 Top-10 Economic Predictions for 2016 UK wage growth is finally well above inflation after an extended squeeze on consumer purchasing power CPI and earnings growth -2 -4 2006 2008 Consumer Price Inflation Source: IHS © 2015 IHS 2010 2012 2014 Earnings Growth (3-month average) © 2015 IHS 48 Top-10 Economic Predictions for 2016 The Fed and Bank of England will raise rates a little, while others will be on hold or ease more • During 2016, diverging economic fundamentals will call for different policy actions by central banks • With strong growth and early sings of a pick-up in wage inflation, the Fed is set to hike at the December 15-16 FOMC meeting • The Bank of England will most likely follow suit mid-year and the Bank of Canada by the end of 2016 • The good news is that even with these “first movers” interest rates at the end of 2016 will still be low—and negative in real terms • Meanwhile, the ECB has already provided more stimulus and may even more Given the fragile state of the Japanese economy, the Bank of Japan may also ease more • Meanwhile, central banks in the emerging world will be lowering rates as well © 2015 IHS 49 Top-10 Economic Predictions for 2016 The US Federal Reserve will lead in raising policy interest rates, followed by the Bank of England Policy interest rates Percent, end of quarter 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 United States Source: IHS © 2015 IHS Eurozone Japan United Kingdom © 2015 IHS 50 Top-10 Economic Predictions for 2016 Policy interest rates in key emerging markets respond to inflation and exchange-rate pressures Policy interest rates Percent, end of quarter 18 15 12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Brazil * One-year loan rate Source: IHS © 2015 IHS Russia India China* © 2015 IHS 51 Top-10 Economic Predictions for 2016 Inflation adjusted Federal funds rate Federal funds rate, quarterly -1 -2 -3 -4 2000 2002 2004 2006 2008 Minus CPI inflation Source: IHS © 2015 IHS 2010 2012 2014 2016 2018 2020 Minus core CPI inflation © 2015 IHS 52 Top-10 Economic Predictions for 2016 The US dollar will rise further • Over the past year, the dollar has risen about 8% against other major currencies … • … It’s appreciation against some emerging market currencies has been even greater • Given stronger US fundamentals and the fact the Fed is likely to be the first major central bank to raise rates, IHS expects the dollar to rise another to 5% in 2016 • This means that the euro will hit $1.02 by mid-year and the yen will fall to 126 by the end of 2016 • The Chinese renminbi is also set to depreciate a little against the dollar (roughly 4%) given recent capital outflows and the commitment by the Chinese policymakers not to intervene as much in currency markets © 2015 IHS 53 Top-10 Economic Predictions for 2016 The dollar’s real exchange value has appreciated to a 13-year high against major currencies Real trade-weighted dollar index 1.6 Index, 2009 = 1.0 1.4 1.2 1.0 0.8 0.6 1980 1984 1988 1992 1996 Major trading partners Source: IHS © 2015 IHS 2000 2004 2008 2012 2016 2020 Other important trading partners © 2015 IHS 54 Top-10 Economic Predictions for 2016 Emerging-market currencies have depreciated Weekly exchange rate indexes USD/local currency, 2013:1=100 110 100 90 80 70 60 50 40 Jan-13 Jul-13 China Source: IHS © 2015 IHS Jan-14 India Jul-14 Brazil Jan-15 Russia Jul-15 Jan-16 South Africa © 2015 IHS 55 Top-10 Economic Predictions for 2016 Exchange rates per US dollar Canadian dollar Euro 1.6 1.2 1.4 1.0 1.2 0.8 1.0 0.6 0.8 0.4 0.6 2000 2003 2006 2009 2012 2015 Source: IHS 2018 © 2015 IHS Japanese yen 0.2 2000 120 100 80 60 2003 Source: IHS 2006 2009 2012 2015 2018 © 2015 IHS Chinese renminbi 140 40 2000 2003 Source: IHS 2006 2009 2012 2015 2018 © 2015 IHS 2000 Source: IHS 2003 2006 2009 2012 2015 2018 © 2015 IHS Quarterly averages © 2015 IHS 56 Top-10 Economic Predictions for 2016 10 The risks buffeting the global economy will likely not derail it • The list of global risks is daunting: an escalation in geopolitical tensions and an oil shock, a China hard landing, more weakness in the emerging world, even slower growth in the developed world, and stillhigh debt levels worldwide • The good news is that the usual “recovery killers” are at bay: serious policy tightening is not a near-term danger; the collapse in commodity prices is a net positive (albeit small); asset bubbles are not a major threat in the next couple of years; and even a China hard landing may not hurt the developed world much • The one risk that could derail the global recovery is a big oil shock Fortunately the risk of such an event is low in 2016, given the current amount of excess oil supplies • Since 2011, the downside risks have been offset by upside risks, leaving growth stuck in low gear—the same could happen in 2016 © 2015 IHS 57 IHS Customer Care: Americas: +1 800 IHS CARE (+1 800 447 2273); CustomerCare@ihs.com Europe, Middle East, and Africa: +44 (0) 1344 328 300; Customer.Support@ihs.com Asia 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Percent change 10 -5 -10 1998 2000 2002 2004 2006 2008 2 010 2 012 2014 2016 2018 2020 China Source: IHS © 2 015 IHS India Brazil Russia © 2 015 IHS Top -10 Economic Predictions for 2016 US growth