The major global economies find themselves at different points in the cycle, creating a network of intersecting challenges and opportunities that shifts, kaleidoscope-like, depending on your perspective.
US employment data has improved significantly, but the prospect of the Federal Reserve raising interest rates has market participants preparing for this eventuality and whatever happens thereafter. Disinflationary pressure persists in Europe, though a cyclical recovery also remains in its early stages.
Meanwhile, China continues to work off the overinvestment that occurred after authorities responded to Lehman Brothers’ bankruptcy and the global credit crunch by flooding the economy with cash. Japan has also implemented measures that should help to buck up its flagging economy.
Our outlook calls for global gross domestic product (GDP) to grow by a little more than 3 percent in 2016, with developed economies leading the way. Excluding Japan, economies in Asia should grow at a 5.5 percent clip.
This forecast for global GDP growth implies a fifth consecutive year in which the world economy expands at a slower rate than its 30-year average of 3.6 percent—hardly a surprise with many developed and developing countries struggling with elevated debt levels (see graph) and disinflation.
Political developments in Europe and some emerging economies could also move local markets.
Europe continues to grapple with an unprecedented influx of refugees, and upcoming elections in Spain and Ireland could change the political status quo. In the UK, the Conservatives plan to hold a referendum on whether Britain will exit the European Union; uncertainty surrounding the outcome of this vote could disrupt the UK and Continental economies.
As for the major emerging markets, political uncertainty and currency weakness will ensure that the Brazilian economy doesn’t grow in 2016.