IHS Top-10 Economic Predictions for 2016

Estimated reading time: 10 minutes

Since 2012, world growth has been range-bound between 2.5% and 2.7%. During that time, the growth in the advanced economies has accelerated gradually, while economic activity in emerging markets has decelerated dramatically. IHS expects a slightly better overall performance for the world economy in 2016, with an expected growth rate of around 2.9%. Solid growth in the United States and a slight pickup in the pace of Eurozone and Japanese economic activity, along with an expected easing of recessionary pressures in Brazil and Russia, are among the reasons for this moderately upbeat assessment. In the same vein, low oil prices and more monetary stimulus—in particular, from the European Central Bank (ECB), the People’s Bank of China, and (possibly) the Bank of Japan—will not only support growth, but could also provide the basis for some upside surprises. Unfortunately, there is no shortage of downside risks, including high public- and private-sector debt levels, corporate risk aversion, further weakness in China and other emerging markets, and daunting geopolitical risks. This means that the probability of the global economy being stuck in low gear for another year is still uncomfortably high.

1. US growth will remain solid.

The underlying fundamentals of the US domestic economy remain sound. Consumer spending has been increasing at a rate of around 3% over the past year and is predicted to keep growing at the same pace in 2016. After an off year in 2014, housing activity picked up in 2015 and is likely to remain strong for the next couple of years. Nonresidential capital spending (excluding the energy sector) will also be a positive factor. Last but not least, thanks to the recent congressional budget agreement, government spending will be adding to GDP growth in 2016, after being a negative factor for the past three years. There were three negative influences on the economy in 2015: an inventory cycle, the collapse in energy sector investment, and the impact of a strong dollar and weak global growth. Two of these will ease in the coming year. The inventory correction is likely to be over by the first quarter of 2016, and the sharp drop in energy-related capital spending will probably end in the first half of the year. This means the growth rate of the US economy can be expected to remain in the 2.5–3.0% range in 2016.

2. Europe will keep growing at a modest pace.

After contracting for two years, the Eurozone economy began a modest recovery in 2014, expanding at a 0.9% rate. Growth accelerated a little in 2015 to 1.5%, and is expected to do marginally better in 2016 (1.7%). Four trends are supporting this improved outlook: low energy prices, reduced fiscal headwinds, more monetary stimulus, and a weak euro. The latter two can be expected to support growth even more in 2016. The ECB has indicated its willingness to provide additional stimulus, and IHS expects that the euro will depreciate further. A weakening currency is providing something of a buffer for the Eurozone from weak global growth. While the human toll from the recent terrorist attacks in Paris is incalculably high, the economic impacts will be limited and short-lived. Moreover, in recent months, the risks of Greece leaving the Eurozone have diminished considerably. Meanwhile, UK economic growth will remain steady at 2.4%, and IHS expects that the upcoming referendum will probably not result in the United Kingdom leaving the European Union.

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