After a year of trials and tribulations in the global markets, investors are tempted to see the world economy as a glass half empty. But looking ahead to 2016, we see plenty of good news, writes Alan Higgins, Chief Investment Officer, Coutts
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After a year of trials and tribulations in the global markets, investors are tempted to see the world economy as a glass half empty. But looking ahead to 2016, we see plenty of good news.
We believe that world growth will be surprisingly strong for several reasons. Incomes and consumer spending are rising in the major developed economies, inflation is low – allowing central banks to remain accommodative – and banks are lending more.
Consensus expectations for slowing global growth seem overly pessimistic, given the strength in consumer demand in developed markets in particular. Our forecast is for the world economy to grow at closer to 3.5% in 2015 and 4% in 2016 – broadly in line with the 1997-2014 average of 3.8% per year.
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By GlobalDataGreasing the wheels of consumerism
Low oil prices should continue to grease the wheels of consumer demand across the globe for the next couple of years. The four previous large oil-price declines since the late 1970s were followed by stronger global growth one to three years later. And we are now more than one year into a period of cheaper oil.
Oil prices have more than halved from their 2014 peak, and we don’t see any catalysts for a big move in either direction over the coming year given modest global growth and plentiful supplies. That’s good news for consumers, who tend to spend the windfall from lower fuel bills.
Across the US and Europe, household finances are being bolstered by rising property prices and incomes and borrowing and spending are on the rise. With consumption accounting for nearly two-thirds of national income in these economies, lower oil prices could provide a significant boost to global growth.
Consumerism spreads to China
Weak manufacturing activity surveys through 2015 have highlighted China’s exposure to the slump in global trade. But private businesses represent a large share of the services sector, and equivalent surveys of services activity have proven resilient.
Chinese consumers are also enjoying wage growth of around 7% (adjusted for inflation), have little debt and are only marginally exposed to the rout in China’s stock markets. They also stand to gain from a revival in property prices that began in early 2015.
We think slower growth in China is inevitable, as the economy shifts from being driven by investment to consumption, and also a healthy development. So we believe reports of the demise of China have been greatly exaggerated.
Winners and losers
While emerging markets in general have gone out of favour recently, manufacturing-based economies like China’s should benefit from lower input costs after big falls in energy and metals prices, freeing up more capital for investment. This will favour Asia and Eastern Europe over commodity producers in Latin America, the Middle East and Africa.
Rising for the right reason
While rising US and UK interest rates remain a threat, increases should be very modest and gradual, given the general lack of inflationary pressures worldwide. Interest-rate futures predict only three quarter-point increases over 2016 in the US and UK. We agree with that assessment, and think it’s all for the good. Rates will be going up for the right reason, because growth is picking up, but not enough to choke it off.
While it’s important to be selective, there are still abundant opportunities are out there for careful investors.
