IHS Top-10 Economic Predictions for 2016

Estimated reading time: 10 minutes

Commodity prices have fallen by about one-third over the past year and are down nearly 60% since the beginning of 2014. The biggest factors behind the plunge in nonoil commodity markets have been the struggles in China’s manufacturing sectors and the associated large declines in its imports from the rest of the world. While suppliers have cut production, demand has weakened even more. Production cutbacks are likely to continue, and IHS expects that prices will begin to firm during 2016. In the case of oil, weak demand from China was compounded by strong production from the United States and the decision by OPEC to not cut production. Low prices are having an effect on US producers. IHS expects a cut in US output of roughly 600,000 barrels per day between mid-2015 and mid-2016. This will likely be enough to put a floor on prices. However, lower US production costs and increased productivity will continue to push break-even points lower, limiting upside price risks in 2016. The prices of both oil and other commodities are expected to be flat though the first half of 2016, and then begin to rise very gradually in the second half.

7. Any rise in inflation will be modest.

A variety of factors have conspired to keep inflation in many parts of the world in check. Principal among these are the large amounts of excess capacity worldwide and the nosedive in commodity prices. Assuming that commodity prices are either flat or fall more, this benign state of affairs will continue throughout 2016. There are two exceptions to the low-inflation picture. First, in countries where currencies have also tumbled, inflation rates have risen. Brazil and Russia are cases in point. The other exception is a potential rather than an actual threat. Both in the United Kingdom and the United States, labor markets are becoming tighter. This is manifesting itself by a modest upward movement in wage inflation. By some measures, there is additional slack in the American and British labor markets. This means that any further rises in wage inflation in the coming year will probably be small. Moreover, in light of the (still) vast amounts of excess capacity worldwide, inflationary pressures in most parts of the global economy will remain muted throughout much of 2016.

8. The Federal Reserve and the Bank of England will raise interest rates a little, while other central banks will either be on hold or ease more.

During 2016, diverging economic fundamentals will call for different monetary policy actions. The United States and United Kingdom will be growing faster than most other developed economies. With early signs of wage inflation in both economies, the Federal Reserve and the Bank of England (BoE) will raise interest rates sooner than their peers. The Fed is set to hike rates in December (for the first time since 2006), and the BoE will probably follow suit by midyear. There is a good chance that the Bank of Canada may also jump on the rate-hike band wagon by the end of the year. The good news is that even with these "first movers," interest rates will remain very low (negative in inflation-adjusted terms) through the end of 2016. Meanwhile, in December, the European Central Bank pushed overnight rates further into negative territory and extended its quantitative easing program. Considering the fragile nature of Japan’s economy, there is a chance that the Bank of Japan may also extend or expand its bond-purchasing program.

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