Yet again consensus forecasts portend a quickening in the pace of global growth for 2016. The expected advance is of limited magnitude, however, with GDP predicted to grow by around 3.4% some three tenths above the current year’s expected outturn. Little change is expected from developed market while the upturn in emerging markets largely reflects sizeable rebounds in some of the worst hit economies. Ongoing strong developed market domestic demand growth and an expected rebound in industrial production are the key drivers.
A similar pattern to this year’s robust US domestic demand-led growth, partly offset by a negative net trade contribution, is predicted for 2016 resulting in headline GDP growth remaining in the 2-2.5% range that has contained much of this cycle. The household sector remains key to sustainable expansion and ongoing healthy employment and income growth should counterbalance waning benefits from lower energy prices and an expected modest and gradual rise in interest rates. A faster pace of inflation and too strong a dollar, however, could both upset Fed policy.
That euro area business and consumer confidence proved resilient to several shocks this year suggests the recovery is strengthening and steady growth of around 1.5-2% is expected for 2016. Growth has spread more broadly throughout the region and there is still scope for further quantitative easing should inflation disappoint. Other main risks are from China, geopolitics and domestic political issues.
What Can We Expect in the UK?
As in the US, modest headline UK GDP figures have disguised a far more rapid pace of domestic demand growth. Still solid progress is foreseen but some softening appears likely as real income growth subsides and overall GDP may slip a little below recent trends to 2¼% growth. “Brexit” is a key risk but a vote to stay in Europe remains odds on.
Following another difficult year for the Japanese economy, consensus forecasts indicate a consumption-led revival but with GDP growth still only rising to around 1% in 2016 from an anticipated 0.6% this year. Further government and central bank support measures may be required to achieve respective growth and inflation targets with plans to raise wages a key issue. Japan’s economy is also amongst the most geared to a recovery in global industrial production.
The rebalancing of the Chinese economy away from fixed investment growth, manufacturing and exports towards growth in consumption and services continues to have a global impact but less of one on “official” full year headline GDP growth figures. Policy easing has proven necessary to maintain a near 7% GDP growth rate and more may be required to achieve the 2016 consensus 6.5% growth forecast. Quarterly data is highly volatile and China remains one of the main risks to global growth given the ongoing slowdown in the manufacturing and real estate sectors.
Although not collapsing in the second half as many had feared, fundamental macroeconomic challenges remain in Asia Pacific and emerging markets. While showing some pick-up from a very weak period, emerging markets GDP growth is likely to increase only modestly to around 4.4% in 2016 from 4.1% this year. Some stabilistation should come from those countries that have experienced significant downturns but there will be little relief for those linked to Chinese supply chains and commodity demand.
Both lead countries, China and India, are forecast to grow at slightly slower rates while the rest of Asia Pacific will witness little change in pace. Risks remain high and include the emerging market bear’s favourite bogeyman, the emerging market debt overhang and the need for deleveraging amidst rising interest rates and a stronger dollar.
And Inflation?
It should be all change for headline CPI inflation in 2016 as the collapse in energy prices gradually exits the year on year data. Headline figures will gradually align with core CPI inflation which is trending slightly higher in most leading economies. Although only US headline and core are likely to attain target levels, inflation is now back on central bank radar screens.
