Global economy: Scenario for 2016

There is no end of crystal-gazing about the shape of the world economic landscape in the year 2016. The intensity and persistence of curiosity on the subject is not a little due to the turmoil and twists and turns that the global economy went through in the last year. The International Monetary Fund (IMF) forecast that the world economy would grow by 3.5 per cent in 2015. In the months that followed the forecast, the figure was steadily whittled down, reaching 3.1 per cent by the end of the year. Slow recovery of the US economy and appearance of sudden sluggishness of the Chinese economy led to cautious optimism, if not outright pessimism by IMF. Unraveling of the emerging economies about the same time caused by declining commodity prices and capital outflows stoked the gloomy outlook.
A consensus is now growing that the factors that dragged down the global economy in 2015 will more or less persist in 2016. Growth of the US economy will be slow, that of the Chinese economy unsteady, the emerging economies will remain weak and the Euro zone economy will be hobbled by debt de-leveraging. Compounding this scenario the global trade will be slow in growing. According to the cynical among analysts, IMF should stop forecasting renewed growth rate and instead issue warning signals that the global economy will remain weak and vulnerable during the current year.
The overriding question is balancing the positive and negative factors. What can be expected in 2016 in the global economy? The mainstream forecasters think that the prospects are slightly better than last year. According to them, the forecast by IMF of 3.6 per cent growth of the world economy is tenable based on current trends. It is pointed out that though the growth of the world economy was sluggish last year, an up tick has been noticed in the beginning of the current year. Taking a cautious stand, the managing director of IMF has, however, warned that an updated forecast may not be robustly positive. The basis for the cautious optimism is that the recovery from the recession that followed the international financial crisis of 2008 is still continuing. The global economy has not yet turned around convincingly. The cautious forecast indicates uncertainty about the trend in global economy.
It is pertinent to analyse the big issues in the world economy in the current year to place the forecast made about it in correct perspective. The factors that will determine whether developments will turn out better or worse than the conservative estimates by forecasters, including IMF, are not many in number but are significant in terms of impact. It is seen that three factors are dominant and will continue to be so throughout most of 2016 in determining the shape and trend of the world economy. These factors originate from the role of the world economy's three important regions: United States, China and the Emerging Economies. In America, the return to a more normal rate of interest began in December last year. The Federal Reserve Bank (Fed) finally raised the main interest target from the level of almost zero at which it was since the end of 2008. The Fed will continue to monitor inflation and employment to determine if further rises are called for -- it has been announced by the chairman. If further increase takes place, which is very likely in the event of further improvement in employment figures, it will cause some disruption to the emerging economies. Such a rise in the interest rate will lead to higher borrowing costs and lower value of currencies of emerging economies because money will take flight to the US economy. This in turn will make it more expensive to repay loans in dollars. Companies in the emerging economies that borrowed dollars will be in dire straits. This risk may have already become a reality as financial markets have moved in anticipation of the Fed's decision to raise base interest rate. Of course, there has been no emerging market financial crisis so far but the risk of financial market turmoil is lurking in the background. Expressing concern, Prof. Carmen Reinhert of Harvard University wrote recently: "Emerging economies' debts seem largely moderate, perhaps by a large margin. If so, the magnitude of the ongoing reversal in capital flows may be larger than is generally believed -- potentially large enough to trigger a crisis."
Many economists have come to the conclusion that emerging economies have improved their economic policy in recent years and are better poised to ward off an international financial crisis now. But they concede that some emerging economies are fragile enough to buckle under or teeter on the brink faced with financial market turbulence. As examples, the following cases are cited: Russia due to the lower price of crude oil, Brazil owing to domestic political crisis and Venezuela due to creeping recession.
The most critical factor impacting adversely on the global economy has been identified to be China's slowing economic growth and capital market turbulence. China's economic slowdown is widely seen as inevitable arising from manipulative growth sustained by debt-fuelled investment and massive exports the official data of 10 per cent annual average growth shown for the last 30 years could not be held up indefinitely. During the current slowdown the paramount question has been whether Chinese economy will experience a smooth transition or a hard landing? The stock market chaos in the middle of 2015 and several weeks of volatility have reappeared in the beginning of the new year sending shock waves across the global financial market. If the Chinese authorities repeat the bungled management of the stock market crisis of 2015 the present development may be the harbinger of a major crash. The crisis may be aggravated by the restive currency market which has seen several changes in the exchange rate. At the moment the exchange rate appears to be neither pegged to dollar or a basket of currencies nor free-floating.
China's economic slowdown and capital market volatility cast a pall of gloom on the commodity market -- oil, gas, metal and food items. Decline in demand for commodities originating in China has already taken a toll on the economies of South Africa, Brazil, Argentina and Zambia. The fall of oil prices has been particularly damaging for countries that depend on exporting it like Russia, Iran, Venezuela and Nigeria. What is disconcerting for these countries is that oil price has not rebounded yet, rather the downward spiral is continuing with the price now below US$ 30 per barrel, an all time low. Unless demand for oil picks up following a strong recovery of the world economy or there is drastic reduction of production the prospect for rise in oil price appears dim. Neither of these possibilities seem imminent.
The broad picture that emerges from the above analysis is that the rich countries (America, EU) have been through a slow recovery, a trend that will persist in 2016. They will be spared of the spectre of recession. Among the emerging countries China will post a single digit growth rate due to economic slowdown while other emerging countries will grow at rates below their potential. In all probability this group will experience a temporary setback and not a prolonged stagnation. The IMF's prediction that growth for emerging and developing countries will pick up this year from 4.0 to 4.5 per cent appears problematic given the weak demand for their exports and the capital flight. As regards the least developed countries (LDCs), they are likely to continue at the present rate of growth if they can enjoy the same demand for their exports with favourable concessions from the rich countries. All told, the global economy is likely to go through a period of slow recovery and growth in 2016. This will be an improvement over 2015 which witnessed recession in the developed countries dragging down the world economy.
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