2016 global economic prospects: Overall fragility, regional divergences

Analysis by François Letondu, Economist at Societe Generale

The global economy has shown signs of fragility in late 2015 and early 2016, and the situation is unlikely to substantially improve this year. However, economic performances vary significantly from region to region. Indeed, although growth should slow in emerging countries, and notably in China, it should accelerate slightly in developed countries.

In the eurozone in particular, domestic demand developments should remain positive thanks to weak oil prices – which seem likely to prevail for some time. The very low interest rates, fuelled by the ECB’s accommodative monetary policy, will help indebted households and businesses. Indeed, in France investment in new housing increased for the first time in over two years at the end of 2015, and this trend is likely to continue. The strengthening of the eurozone recovery should boost growth in Central and Eastern European countries, which are already seeing a more positive trend than other emerging countries.

In the United States, growth should remain above 2%, again driven by domestic demand and, in particular, by household consumption. Exports, however, are expected to remain weak because of the strength of the dollar and the subdued imports from emerging economies.

Indeed, emerging countries’ growth models are losing steam. The slowdown in global trade should continue to weigh on their industrial sectors. Chinese growth should thus slow further below 7%. Furthermore, financing in dollars is becoming more expensive and is likely to halt the trend towards “easy” leverage observed in previous years, thus limiting investment.

Emerging countries that are producers of raw materials should remain destabilised because of weak commodity prices, and notably weak oil prices. Brazil and Russia should thus remain in recession, and their currencies should continue to depreciate.

The impact of the slowdown in emerging economies on developed countries will nevertheless continue to be closely monitored by central banks. The European Central Bank is expected to accelerate its monetary easing in 2016. The Federal Reserve, meanwhile, could well take a breather for a while before continuing the upward cycle of its key interest rates initiated in late 2015. Within this framework, short- and long-term interest rates should remain at low levels on both side of the Atlantic.