The Economy in 2016: Buying Time Before All the Old Problems Resurface

What’s in store for the world economically in the new year? While he cautions against predictions, Guardian economics editor Larry Elliott projects that “there will be no explosion in 2016, but a fuse will be lit.”

Here are some of his best educated guesses:

The big story of the past month has been the collapse in oil prices, which has taken the price of crude back to levels last seen in 2004. This has two beneficial effects for the global economy. It provides additional spending power for households and businesses that consume energy, and it bears down on inflation. […]

So prediction number one for next year is that both inflation and interest rates will stay lower for longer than currently anticipated. […]

The next theme of 2016 will be China, where the question is not whether the pace of growth will slacken, but by how much. […]

The risk, of course, is that China cleans up the mess caused by one collapsing bubble by inflating another, which is what Alan Greenspan did in the US in the early 2000s. Here, then, is a second prediction. China will slow in 2016 but policy easing will prevent a collapse. […]

There are a couple of reasons […] why the eurozone might stumble through to 2017 before there is fresh trouble. The first is that it will benefit from the delay in tightening policy in the US and the UK, and from pro-growth measures in China. The second is that the ECB will keep using quantitative easing in the hope that an increase in the supply of money will get the banks lending. The ECB is also keen to drive down the value of the euro to boost exports, although this may prove more difficult if the Fed raises interest rates more slowly than the markets currently expect. There is a good chance the dollar will fall rather than rise against the euro.

The biggest immediate risk to the global economy comes from the emerging world, especially those parts of it affected by the crash in the cost of commodities.

Brazil is the country to watch out for. It is the biggest economy in Latin America and in serious trouble. The economy is contracting at its fastest rate since the 1930s, inflation is above 10%, the currency has collapsed and the finance minister has just resigned. A visit from the International Monetary Fund may be unavoidable.

Read Elliott’s full comment here.

— Posted by Alexander Reed Kelly.