IHS Top-10 Economic Predictions for 2016

Estimated reading time: 10 minutes

Over the past year, the dollar has risen about 8% against other major currencies. Its appreciation against some emerging-market currencies has been even larger. In light of stronger US fundamentals relative to the rest of the world, and given that the Fed is likely to be the first major central bank to raise interest rates, IHS expects that the dollar will appreciate another 3–5% in the first half of 2016, before topping out. This means that the dollar/euro rate will approach parity by the middle of 2016, reaching as low as $1.02 by midyear. Similarly, the yen is predicted to hit 126 per dollar by the end of 2016. The Chinese renminbi is also set to depreciate gradually against the dollar. This is a function of downward pressure on the currency from capital outflows, as well as the commitment by Chinese policymakers to limit the amount of intervention in foreign exchange markets (as part of China’s new status as a reserve currency). That said, IHS does not expect any dramatic changes in the dollar/renminbi rate. The currency will continue to be managed, but not in as rigid a way as before. Thus, depreciation on the order of around 4% in 2016 seems most likely.

10. The risks buffeting the global economy will likely not derail it. As highlighted above, there is no shortage of risks facing the global economy.

Fortunately, none has done severe damage—so far. Just as importantly, the usual "recovery killers" are a distant threat. First, with a few exceptions, policy tightening is not a danger to recoveries in most parts of the world. In fact, from a global perspective, monetary policy may become a little more stimulative in 2016. Second, the net effect of the commodity rout on global growth is positive, albeit small. Third, asset bubbles (and the potential for them bursting) are not a significant hazard. Finally, while the risk of even slower growth in China is high, the impacts on the developed world and commodity-importing emerging markets is limited. The one risk that could derail global growth in the near term is a big oil shock, triggered by an escalation of the Middle East conflicts. Fortunately, the probability of such an event in 2016 is relatively low. Since 2011, the upside and downside risks to the world economy have largely offset one another, leaving growth stuck in the 2.5–3.0% range—the same is likely to be the case in 2016.

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