The world economy is expected to grow by a moderate 3.1% in 2016, in line with its performance this year.
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This apparently steady outlook does however mask the gap between predominantly positive trends in the developed economies and a general deceleration in growth rates in most of the key emerging markets, according to Julius Baer.
As Janwillem Acket, Bank Julius Baer’s Chief Economist, warns, “This marked cyclical divergence represents a serious global economic and deflationary risk, for which no obvious remedy is available, since the scope for monetary-policy measures is virtually exhausted and commodity prices are already low.â€
Bank Julius Baer’s economic confidence for 2016 is inspired by its outlook for consumer spending in the world’s large, developed economies – the USA, Europe and Japan, which are all benefiting from consumers’ increased purchasing power and higher rates of employment.
The upturn in the US will enter its seventh year in 2016, and now has its zenith behind it. The recovery in the eurozone, conversely, is a mere three years old and still has further potential.
The resulting strong levels of demand are helping Swiss exporters to weather the price shocks induced by a strong Swiss franc.
Indeed, compared to the now stronger US dollar, the Swiss franc is currently slightly undervalued, which should boost Swiss exports to the dollar area.
Against that backdrop, 2016 should see Switzerland’s economy recover from the cyclical setback caused by the sudden appreciation of its currency at the beginning of this year.
While they anticipate that aggregate growth across the emerging markets as a whole will be disappointing, Bank Julius Baer’s experts remain confident about the outlook for the two largest emerging markets, China and India.
China is now confronting a new reality. In the foreseeable future, it will need to adjust to significantly lower annual growth rates than the ambitious 6.5% targets set in its new five-year plan for 2016-2020.
Both Asian giants are major importers of raw materials, and will continue to benefit from low commodity prices. However, in contrast to 2014 and 2015, the overall world economy is unlikely to derive much additional stimulus from declining prices for raw materials next year.
The same applies to monetary policy. Despite further key-rate cuts in China and India, real interest rates across all emerging markets, unlike those in the developed economies, remain relatively high and are thus constraining growth.
Overall liquidity in emerging-market economies with balance-of-payments deficits is becoming increasingly tight. Since the credit cycle in many of those countries is also well advanced, disruptions cannot be ruled out. ■