2016 is expected to be a challenging year for the global economy. According to a recent forecast by the International Monetary Fund (IMF), global GDP will expand just 3.6% in all of 2016, down from a prior estimate of 3.8%. A gloomy economic outlook is expected to weigh on the financial markets, which just came off their worst quarter in at least four years.
For investors already looking ahead to next year, below is a recap of six predictions for 2016. As you can tell, the picture doesn’t look very good.
- Stock market crash
Several market analysts are forecasting an all-out financial crisis in 2016, largely stemming from the huge debt burdens governments have assumed since the last financial crisis. Although stocks declined sharply in the third quarter, some analysts still maintain they are overvalued. Above all, many are concerned that record quantitative easing has made asset valuations difficult to predict. Rising real estate prices in the US is part and parcel of government money printing. According to the Financial Times, commercial real estate prices in the US are at all-time highs.[1] That’s not very reassuring for a country that’s less than a decade removed from a massive real estate bubble.
- A new Greece crisis will simmer beneath the surface
Greece probably won’t make the financial news headlines in 2016, but that doesn’t mean the country is saved. Far from it, according to several market analysts, who aren’t convinced that Athens’ third bailout agreement with the troika solved Greece’s problems. The new bailout terms don’t address Greece’s persistent productivity and labour deficits, weak business investment and cumbersome legal system that deters investment.[2] Cynics also argue that the deal wasn’t meant to “save” Greece, but to bully it into submission.
- $60 oil the new $100
Global crude prices are forecast to rebound slightly next year, but won’t sustain upside north of $60 a barrel. According to a recent forecast by the US-based Energy Information Administration (EIA), international benchmark Brent crude will average $59 a barrel in 2016. The West Texas Intermediate (WTI) benchmark for US crude is forecast to average around $55 a barrel. Multinational investment bank Goldman Sachs is much more pessimistic, suggesting that Brent could bottom out at $20 a barrel in a worst case scenario.[3]
- Bond yields much lower than expected
The Federal Reserve’s reluctance to raise interest rates might drive the benchmark US 10-year bond yield down to 1.5% by the third quarter of 2016, according to HSBC’s Steven Major. Fed policymakers have been deliberating for months about whether to raise interest rates, but have resisted doing so thanks to low domestic inflation and volatile international markets. According to Major, European bond yields will also trend lower next year as the European Central bank continues its €1.1 trillion stimulus program. ECB President Mario Draghi has gone on record to say that the central bank is even prepared to expand its QE program to meet its growth targets.
- More QE
It’s hard not to see this one coming. The fall in global commodity prices is throwing a wrench in central banks’ inflation expectations. As a result, the Eurozone and Japan are seen increasing their massive quantitative easing programs into next year to boost inflation and economic growth. The ECB’s monthly €60 billion stimulus program is scheduled to run until September 2016, but many economists expect policymakers will either extend the duration or increase the amount (or both) well before then. In Japan, a fledgling Abenomics program could see the BOJ expand its QE program as soon as this month, according to economists. Policymakers are likely waiting for the latest batch of data before deciding when to press forward.
- Chinese growth pessimism deepens
The world’s second-largest economy will slow even more next year, according to a recent prediction by Goldman Sachs. The multinational bank actually slashed its forecast for Chinese growth over the next three years, highlighting the deep structural challenges Beijing faces in transforming its economy away from exports and toward consumption. China’s economy slowed to a 24-year low in 2014 and is forecast to slow again in 2015 before growing just 6.4% next year.[4] A slowing Chinese economy will continue to pressure global commodity prices and result in added volatility in mainland stock markets.
Final Thoughts
Predicting what will happen in the global economy is never an easy task, especially in today’s hyper connected market. The only prediction that we guarantee will come true is there will be no shortage of conflicting viewpoints. If you’re an investor, it’s always wise to take these predictions (and any others, for that matter) with a grain of salt.
[1] Casey Research. “One of the World’s Most Respected Investors Predicts 2016 Stock Crash.”
[2] McKinsey & Company (March 2012). “Greece 10 Years Ahead.”
[3] Yadullah Hussain (September 11, 2015). “Despite Goldman’s gloomy $20 a barrel prediction, demand hints at oil price recovery.” Financial Post.
[4] Ansuya Harjani (August 31, 2015). “Goldman takes a knife to China’s GDP forecasts.” CNBC.
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