The volatility that shook the markets in 2015 has carried over into the early weeks of 2016. The plunging equities market, oil prices, and the Chinese economy has set the tone for how this year could play out. Coming into 2016, the International Monetary Fund predicted disappointing global growth of 3.4%, down 0.2% from its June 2015 estimates. The events of 2015 have had spillover effects in 2016 including, wavering equities markets, plummeting oil prices, a significant slowdown in China, the near collapse of Greece and the Eurozone, and the tightening of U.S. monetary policy. Also, growth in global trade is slowing considerably, posing risks to material prices, the financial sector, and emerging markets. Despite what appears to be a global slowdown in 2016, a number of the largest economies are expected to carry the global economy as emerging markets fluctuate.
The United States
At over $18 trillion, the United States is the largest economy in the world. Despite China’s rapid ascension in the global economy, the U.S. economy keeps the world spinning. Besides being home to the biggest financial hub in the world, the U.S. economy is a leader in a number of facets in the global landscape. With a GDP per capita of over $50,000, the U.S. economy is all about consumer spending. That being said, many of our favorite products we consume have likely been manufactured abroad and imported. The U.S. continues to be one of the largest importers of foreign goods, strengthening trade which stimulates the global economy. Further, the United States is a significant business investor. In 2014, net foreign direct investment from the U.S. economy equaled $225 billion. This says the amount of capital outflow was far greater than the net inflows of investment. Through the economic turmoil of early 2016, the U.S. economy will be looked to as a stable source stimulating the global economy.
Given how poorly the Chinese economy has performed recently, it may seem foolish to believe China will perform well in the global landscape of 2016. The 10% plus growth the economy had been experiencing has slowly waned and official expectations for 2016 hover around 7%. Despite the bearish expectations surrounding China, the second-largest economy is not on the brink of a financial crisis. In other advanced economies, growth rates of 7% would be viewed with jubilation. To put this in perspective, advanced economies target 2 to 3% growth for a given year. As heavy industry and investment growth have slowed significantly, Chinese consumption and services have remained strong. The challenges which have plagued China to this point in 2016 come amid a transition from an export-led economy to a consumption based economy. It can’t be said with certainty whether China can overcome these obstacles in 2016, but when they do, they legitimize themselves as a more stable economy.
Even through the current economic storm, the South Asia region, led by India, remains a bright spot in the global economy. The World Bank projects India to usurp China as the fastest growing large economy in Asia with robust growth projections of 7.8% in 2016. Behind the popular BJP party, Prime Minister Narendra Modi has put in place legitimate resources to tackle the country's greatest problems. The central bank has cut interest rates multiple times to reduce the country’s chronically high inflation. Compared to most other major developing countries, India has positioned itself to withstand the near term volatility. New reforms have supported legitimate domestic business cycles and reduce external vulnerabilities in the global financial market. Progress on infrastructure improvements and government efforts to boost investments in infrastructure are expected to offset the impact of higher U.S. interest rates and strong U.S. dollar. As the economy becomes more interconnected, marginal improvements in large economies have profound effects on the global stage.
Moving away from Asia and towards Europe, the European Union has been performing quite unfavorably since the 2008 Financial Crisis. As the economy continues to wane, experts have predicted an end to the Eurozone if another financial crisis were to strike. That being said, there remain a few bright spots amongst the members that make up the European Union.
England has viewed economic turmoil throughout the EU as a drag on their economy. This has caused trepidation of a looming Brexit from the EU in 2016 and rightfully so. During the recovery from the financial crisis, certain nations have been consistent sources of strength, such as the United Kingdom and Germany. As inflation and employment stabilize in England, the country is pursuing raising interest rates within the next two years. By raising the interest rates, the pound will remain relatively competitive when compared against the US dollar. This can also be beneficial too for England exports to other regions in Europe. While a higher domestic currency typically means declining exports, England’s biggest importer happens to be fellow EU members in Europe.
The stalwart of the European Union, Germany carried Europe through 2015 and is expected to do the same in 2016. Germany’s growth has been driven by strong domestic demand as imports outweigh exports. In 2015, Germany experienced accelerated growth in private consumption, government spending, exports, and imports. Consequently, the nation can operate with strong labor union and high-cost workers, which further boost employment and the overall economy. After a record year in terms of GDP growth, Berlin expects the German economy to expand into 2016 on the back of strong consumption and services. Since Germany is one of the largest economies, its success will have widespread implications for the European Union and on the global economy
The Bottom Line
Plunging oil prices, financial markets and downturns in China have led many experts to believe the remainder of 2016 will follow this trend. If that is the case, growth in the global economy will be supported by some of the world’s largest economies. In times of economic turmoil, investing in emerging markets becomes inherently riskier and less appealing. As a result, advanced economies are viewed as safe havens stimulating the global economy. In any case, the Federal Reserve is unlikely to pursue negative interest rates, even if the economy goes into recession again.