Who Will Drive Global Economic Growth in 2016?

Nearly nine weeks into 2016 and fears continue to mount that the global economy will experience a significant slowdown this year.  With many developed economies struggling to boost their rates of economic growth and with many of the world’s leading emerging markets seemingly trapped in serious slowdowns, it is easy to see why pessimism surrounding the outlook for the global economy is so pervasive.  However, we continue to believe that the global economy is not in the midst of a major slowdown, but rather, is stuck in a period of relatively slow growth of around 3%, the same level of growth that has been in place since 2012.  This is due to the fact that many of the world’s leading economies continue to generate substantial growth for the world economy, even if growth rates in most of the world’s leading economies remain below pre-financial-crisis levels.  What is important for businesses and investors is to determine which markets are generating the biggest opportunities amid relatively sluggish levels of global growth.

Despite the fact that there are significant concerns about the outlook for many of the world’s leading developed economies, the fact is that many developed economies are in a better position today than they were just a few years ago.  While North America has seen its shale- and oil-sands-boom dissipate amid lower oil prices, consumers in the United States are increasing their spending and this is allowing the US economy to grow at a decent level.  With growth in the United States forecast to be 2.5% in 2016, the US will remain a leading driver of growth this year, accounting for one-third of the increase in global economic output this year.  Meanwhile, the European Union’s tentative economic recovery will continue this year, with the EU economy forecast to grow by 1.5% this year, resulting in the EU accounting for an additional 20% of the increase in global economic output this year.  In contrast, Japan’s economic struggles will continue this year, with growth forecast to remain anemic at just 0.5% in 2016.  Altogether, the world’s developed economies are forecast to account for nearly 60% of the increase in global economic output this year, reversing the trend of just a few years ago. 

While developed economies have returned to their position as the leading driver of global economic growth, emerging markets continue to play a major role in propelling the global economy forward, particularly in Asia.  For example, even with Chinese GDP growth forecast to slow to 6.6% this year, China will match the United States’ contribution (33%) to global economic growth in 2016.  Moreover, this rate of growth will contribute more to global economic output than the 14.2% growth recorded by China back in 2007.  Meanwhile, the world’s new fastest-growing large emerging market, India, will continue to record growth rates in excess of 7% this year, although India’s smaller economic output means that India will account for just 8% of the increase in global economic output in 2016.  Southeast Asia will also grow at a healthy pace this year, and its contribution to global economic growth in 2016 will be 5%.  In contrast to the strong growth in Asia, emerging markets elsewhere will continue to struggle, with Latin America being dragged down by the deep downturns in Brazil, Venezuela and Argentina, and with Russia continuing to suffer from low oil prices and international sanctions.  Meanwhile, commodity exporters in the Middle East and Africa will continue to suffer from low natural resource prices and as result, emerging markets outside of Asia will contribute almost nothing to global economic growth in 2016.

Altogether, while the global economy continues to grow at a relatively sluggish pace, there are opportunities for growth.  Interestingly, most near-term growth opportunities will be found in the traditional drivers of global economic growth, the United States, China and the European Union.  In addition, Asia will continue to play a leading role in driving global economic growth this year, a role that will expand as the economic output levels in that region continue to grow.  In contrast, many of the world’s previous higher-growth markets, particularly those outside of Asia, will continue to struggle and there is little prospect for a return to growth in these markets in 2016 and even into 2017.  As such, business and investors need to adapt to this “new normal” in which traditional markets are once again the key drivers of near-term growth.  Moreover, businesses and investors need to be more selective in choosing markets, as risk levels are rising, while growth levels are failing to do likewise.