Although statistics tell us there are fewer wars and victims of war today than at any other point in history, it certainly doesn’t feel that way. The current conflicts that have marked 2015 will continue to do so next year. The Syrian situation has become even more desperate. The West is being dragged deeper into the conflict as a result of the immigration crisis in Europe, the attacks in Paris and Beirut and the downed Russian airliner in Egypt’s Sinai Peninsula. As military interventions scale up, we’re sure to be reminded of the situation in 2016. Other hot spots include Africa, the Caucasus and the Middle East. Even a country like Venezuela might experience political unrest on the back of a rapidly deteriorating economic situation. Although we might wish it differently, the world is unlikely to remain conflict-free in 2016.
Global trade growth has weakened over the past years, raising expectations for the Trans-Pacific Partnership (TPP) agreement. The agreement contains measures to lower trade barriers by removing 98 percent of tariffs on goods traded between the participants. This will help Asia and Australia gain ground in the United States, which accounts for about 30 percent of world consumption. The agreement is also expected to drive necessary reforms in Japan. Japan is also engaged in trade negotiations with the EU, and a successful conclusion of these talks, in combination with the TPP, will have a significant positive effect on Japan’s GDP growth. In addition to the TPP, similar negotiations are taking place between the United States and Europe, the Trans-Atlantic Partnership, that are sure to get more attention as discussions progress in 2016.
Trust is supposedly the greatest currency of all. Exchange rates depend on the trust of the market. At the same time, weaker growth tends to tempt countries to raise the competitiveness of their currencies. A weaker currency supports exports, while reduced imports will increase your growth figures. A win-win for the country, but less so for your trading partners. Thus, a weakening currency is often met with suspicion – is it too weak on purpose to gain a competitive edge in the market?
This lack of trust is exactly what happened when China allowed a wider trading band for the yuan in August, sparking complaints about unfair currency practices. In reality, the effect was relatively limited and probably more related to positioning the yuan for inclusion in the IMF’s Special Drawing Rights basket, which has made it a global reserve currency. Nevertheless, the currency developments will continue to attract interest, particularly given the strength of the US dollar, which is expected to continue in 2016. Both the yen and the euro remain weak compared with the US dollar. This will support Japanese and European exports while slowing US exports. A strong US dollar will also challenge the finances of a number of emerging markets by making their debt harder to service, since much of their obligations are dollar denominated. Trust that currencies will remain a topic in 2016.
Central bankers’ grey and serious reputation is a bit unfair given the excitement that even their briefest statements tend to cause. Since the financial crisis they have played the leading role in financial markets. Mario Draghi, president of the European Central Bank, has vowed to do “whatever it takes” to rejuvenate European growth, and Haruhiko Kuroda, governor of Bank of Japan, currently runs the world’s largest quantitative-easing programme, set to last well beyond 2016. However, the majority of attention next year will be on Janet Yellen, the chair of the Board of Governors of the Federal Reserve System in the US. How soon and how fast she raises interest rates will be pivotal for both equity valuations and global growth. If that’s not exciting, then what is?
Next year will be a year of politics. The US presidential election will take centre stage, but there are other political processes that will also have a significant impact on the global outlook. Both South Korea and Australia have elections, and Thailand is supposed to transfer power from the military junta to an elected congress. The move has been postponed several times, but it is now scheduled to happen by mid-2017. Spain is marked by increasing pressure from the secessionists in Catalonia who are seeking independence from Spain by 2017. The political clash with Madrid will resonate throughout Europe. In late 2015, Argentina elected Mauricio Macri as its new president. This marked a break with the past, and Macri’s necessary reform policies are sure to hurt in the short term but will hopefully set Argentina on a path to recovery. Brazil also has its share of political turmoil as President Dilma Rousseff struggles with historically low approval ratings, an ever-growing corruption scandal and an economy in recession. There are calls for political change, but with Rousseff clinging to power the climate is set to be tense in 2016 too.