2016: The World Economy on the Road to Recovery?

In 2015, global economic development was characterized by a number of economic and geopolitical crises, leading to a slowdown in global trade and economic growth. Over the next two posts, we want to take a look ahead into 2016 and see where these developments might take us.

Review of 2015: China’s role in the economic slowdown?

In 2015, global economic development was characterized by a slowdown in economic momentum in emerging countries. One of the central reasons for this was the declining growth of the Chinese economy, which is set to continue in the coming years and will have far-reaching consequences for the entire global economy:

• The process of transforming the Chinese economy into a more consumer and service-oriented growth model means that China’s economy will slow down to a growth rate of between five and six – or 6.5 in the best-case scenario – percent per annum in the coming years. Between 1991 and 2014, the average annual growth rate was approximately twice that rate.
• The national economies of South East Asia have a close connection with China, meaning these states also face the prospect of weaker economic growth.
• The decrease in Chinese economic growth curbs the global demand for raw materials. For raw material-exporting countries, such as Brazil and Russia (as shown in figure 1) for example, this means both a lower volume of exports and falling raw material prices too. This, in turn, leads to a decline in export revenues, thus dampening growth. Last year in Brazil and Russia, these circumstances even led to a recession – a decrease in economic performance.
• Ultimately, the economic weakness of emerging countries also has an impact on industrialized nations, as they are not able to export as much to emerging economies. Due to the worsening of sales opportunities, there is a reduction in local investments. Declining exports and investments weaken economic growth and have a negative influence on employment.

These global trade developments were exacerbated by a number of geopolitical conflicts, such as the conflict between Ukraine and Russia, the conflict in Syria and the resulting migration of refugees, as well as political unrest in North Africa and the Middle East.

Prospects for 2016: Why things could get better

The International Monetary Fund is anticipating stronger economic growth for 2016, just as it is for 2017. Other institutions are also expecting more robust economic growth for 2016 and 2017 (please refer to Fig. 2). There are two principal reasons to expect higher growth than in 2015: on the one hand, the hard landing of the Chinese economy, which was still feared last summer, never happened; while on the other hand, Brazil and Russia’s economic output in 2015 did not decline as much as had been anticipated.

Both these developments mean that companies now have higher turnover expectations for 2016 and 2017 than they did by the midway point of 2015. This, in turn, leads to an increased willingness to invest. Higher levels of investment have a positive impact on the overall economic demand for goods, on production, and therefore also on employment levels.

In summary, current forecasts predict that economic development will progress slightly more positively in 2016 and 2017 than it did during 2015. However, these predictions could quickly become obsolete should another crisis appear or an old crisis re-erupt.

Join us next week again, when we take a look at which crises and uncertainty factors are still looming on the horizon and what needs to happen in order for the global economy to remain on the road to recovery.

Or, click here for the team’s sum-up of the 15 most interesting GED blogposts of 2015!