Will 2016 Be a Watershed in Global Economic History?
Investors looking for less volatility and signs of stronger future economic growth may find some comfort in new research from Credit Suisse, which suggests the coming year could be a turning point.
The Global Markets Division 2016 Outlook Report, published by the bank earlier this month, forecasts a modest rebound in global growth at "a somewhat better pace than 2015." It says this will be powered by steady developed market consumption and four interest rate hikes from the US Federal Reserve. However, the report also flags potential risks from a larger-than-expected fall in Chinese investments and possible higher inflation in the US.
Could Growth Rebound?
One of the report's core findings is that global growth is expected to rebound over current levels, assuming that ongoing global growth demand continues. It suggests that the US Federal Reserve will raise interest rates four times throughout the year, while the European Central Bank and the Bank of Japan will maintain their easing bias. Headline inflation in many economies will rebound from the recent global commodity price shock, but the report does not forecast sharply higher core inflation in developed markets. It says Chinese growth will likely rebound early next year, as recent policy measures take hold, while a deepening slump in Chinese investment and subsequent market volatility is a low-probability but high-impact event.
Potential Inflation Rise
It may also be possible that US core inflation drifts upwards, triggering high interest rates and tighter financial conditions. One thing is certain, according to the report: "By the end of 2016, the debate about whether the Federal Reserve can begin the normalization process will have been settled one way or the other. The market is currently focused on the likelihood that the Federal Reserve will not get far, as a combination of weak inflation and episodic increases in financial volatility act to disrupt the process."
"However, while we also see challenges – particularly in China – we consider the greater risk that US inflation begins to awaken as the country's economy approaches full employment." The report adds that the "intersection of the cyclical and the structural" is likely to result in further substantial changes in the flow of capital around the globe. In this case, the main beneficiary will continue to be the US dollar, as American interest rates attempt to decouple from those elsewhere.