Warren Buffett says he always ignores economic forecasts because he does not read “humoristic publications”. Apart from the reflections of the Oracle of Omaha, always full of irony, the fact is that a new course and analysis departments of investment banks, fund managers and multilateral organizations have published reports with their predictions for 2016. There are good news and bad news in all these forecasts. The good is that they all expect another year of global economic growth. In fact, the latest forecast of the International Monetary Fund (IMF) speaks of an improvement in production (world GDP) of 3.6% compared to the 3.1% estimated for 2015. The bad news are that this growth won’t be equal in all regions of the world. Some will be hit by a strong recession.
Six years after the global economy emerged from the broadest and deepest recession in history, the return to a robust and synchronized expansion remains uncertain. In addition the IMF has predicted some downside risks to the global economy more pronounced now than just a few months ago. So we can be prepared to see some volatile moments in the developing economies.
As happened a year ago, the concept that is repeated in the reports is the divergence forecasts. Developed countries have a stronger growth than developing economies but there are also differences between both groups. US will do better than Europe and Japan; while Asia will enjoy better conditions than Latin America. Furthermore, as economies are at different stages of the cycle, differences in monetary policies will widen. While the US has already begun to raise rates (recipe that experts believe that Britain will emulate in the coming months) while Europe and Japan will maintain their expansionary policies until, at least, 2017.
This cyclical divergence posts a serious economic and deflationary risk worldwide for which there is no obvious solution, since the margin offered by monetary policy measures is almost exhausted and the prices of raw materials is already at the lowest levels. This year the US will be the world’s locomotive. However, the US economy starts to enter in a much more mature phase of the economic cycle after a short period of expansion. The current upturn, which now totals seven consecutive years, is taking more than seven out of ten registered upward cycles after World War II. So we are talking about 10 year cycles for the US economy, something that seems to be a bit longer for Europe in the recent years, and obviously less for some other countries.
In 2016 the great challenge for the management of the main investing firms will be the Fed’s normalization of interest rates in the US. As we know from older posts, when interest rates are low and we buy fixed income products as national debt, we incur in the risk of getting the Fed’s interest rates up and automatically our investment will lose value as it offers lower rates than the present times of the economy. The monetary policy of the central bank has a clear impact on corporate financing conditions and the evolution of the dollar. A faster pace of rises desirable could be a drag on US growth by reducing expensive credit and exports. The Fed is a key factor for developed economies. If they keep having success in convincing on the soft approach to rate hikes and hit with pace and depth to apply, everything will be easier. So far he has succeeded, but cannot afford to make mistakes. The survey itself handles the Fed predicts that rates reach as much 1.25% next year from the current web moving between 0.25% and 0.5%.
As regards in Europe, the recovery is at a more delayed and uncertain phase than in the US, although the market consensus expects the Old Continent to remain at this trend of gradual acceleration to take the highest growth since 2011 by the end of the upcoming year. We hope that the European economy moderately accelerates thanks to the encouragement of fiscal policies and monetary conditions that are very favorable.
The tailwinds that have boosted activity in the euro area in 2015, fall of energy prices, depreciation of the euro and low interest rates… next year will be maintained, although its contribution to growth will be lower. This favorable environment does not prevent from suffering from major imbalances. Business investment is showing signs of weakness. This low rate of investment reduces the growth potential of the economy, which together with an unemployment rate still high in the region, could slow more than expected consumption momentum.
Outside the developed countries, China is presented as the great unknown for the future of the world economy. The Chinese government also deals with significant internal imbalances (bubbles in the stock and real estate markets) reorienting its economy away from a model that prioritized the export and investment towards a more based on consumption pattern, including services. In the long run this approach ensures a more sustainable growth, but can generate a short break of the activity in the country with the resulting domino effect on other economies.
During 2015 the concern about China has been a major cause of volatility in the market. We believe that there has been an overreaction and that the Chinese economy is far from a hard landing. Most forecasts suggest a rate of improvement for China from 6.5% to 6% next year. In the short term, the country is rebalancing. Some of the traditional sources of growth such as manufacturing, real estate and public spending have slowed or contracted; however, new engines start working, as the service sector and a new generation of private companies are starting to proliferate.
In 2015 the price of oil has sunk by the mismatch between supply and demand. Experts believe that this scenario with crude oil prices at historically low levels will continue throughout the coming year. The last six brokerage houses that have made predictions about Brent, the European benchmark barrel, put the price range for 2016 of between $ 41 and $ 60 Westpac Barclays. This is very far from the levels that reached in 2011 around $ 126 a barrel.
India enjoys a privileged position relative to other emerging. One of the positive aspects is the benefit of the fall in oil prices, as it is one of the leading importers and this has a direct impact on two of its major imbalances: the current account deficit and inflation. Lower inflation allows the Indian government to implement an accommodative monetary policy and has been able to reduce interest rates by 100 basis points during the past year.
Geopolitics increasingly has a greater impact on the economic future. Consequently, forecasts and reports have specific sections to reflect these risks. BNY Mellon Asset Management warns, for example, that the political scene will have “strong influence” on markets in 2016. Rowena Macfarlane, sovereign debt analyst Standish, part of the US bank manager, recalls that the core of Europe has recovered faster than the pace peripheral countries, and European politics have become polarized as a result of economic uncertainty. Plan on the UK possible exit from the European Union, with France and Germany showing their preference for the referendum to be held in 2016, not 2017, the year of their respective presidential and federal elections.
In the Spanish case, in addition to uncertainty about the outcome of the elections, there is a source of instability unresolved: Catalonia independence (#6). In 2015 we could see how the Catalan independence parties headed another separatist movement. Our forecast is that the Catalan separatist issue continues to make headlines in Spain. It is also likely that the debate on the exit of Greece re-emerge in the coming months. This is because the terms of the bailout that ultimately the government finally accept Athens demanding more austerity and spending cuts, measures that are unpopular when they have to apply.
Natixis has conducted a survey of 600 institutional investors and the main source of volatility for the markets in 2016 will be political factors. There are many fronts that can push the market to a new coaster: terrorism, the refugee crisis or the beginning of a new electoral cycle in the US are some of them.