2015 was an exciting year (some would say too exciting) and this year looks set to continue that trend. We’ve already looked back at some of the biggest headlines of 2015, now let’s have a look ahead to some of the stories to watch in 2016.
In 2015 the unemployment rate in the US hit 5.0%, while growth has averaged 2.2% since the end of the recession prompting the Federal Reserve to raise interest rates for the first time since 2006. Unemployment could fall even further and growth may inch as high as 2.5% while the USD will likely strengthen. Despite fears that higher interest rates could derail economic progress the Fed is confident that – despite uncertainty in emerging markets like China, low oil prices and sputtering growth in Canada and the EU – they will be able to safely normalise interest rates over the next few years.
Canada growth and negative interest rates
Despite still lagging behind the US, Canada may also see growth increase from 1.2% to as high as 1.8% in 2016. Some growth is better than no growth, but 2016 will likely mark only the second time that Canada has posted growth below 2% for two consecutive years since the end of the Second World War.
To bolster growth the Bank of Canada could further cut interest rates from 0.5% to 0.25% or even lower. A 0% interest rate is not off the table, and Bank of Canada Governor Stephen Poloz has even admitted that an unorthodox negative interest rate is a possible recourse available to the central bank if necessary. The first rate announcement of the year is scheduled for January 20.
The Trans Pacific Partnership has not been without controversy. Detractors argue that the deal could cost Canada and the United States jobs, while supporters insist that fewer trade restrictions will boost exports and increase efficiency. The 12 countries discussing the agreement (Brunei, Chile, New Zealand, Singapore, Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States and Vietnam) currently account for 40% of global trade.
Europe will face many challenges in 2016, not least of which is the refugee and migrant crisis which has seen millions of people from war zones and underdeveloped countries around the world displaced. Combined with Islamic terrorism in France, the migrant crisis has prompted talk of greater border restrictions in some circles. Such a move would effectively remove one of the most attractive, business-friendly aspects of the EU and further dull an already muted business sentiment.
In Greece the financial crisis was merely postponed, not resolved in 2015 – a major accomplishment no-doubt but not a permanent solution. Alexis Tsipras of the governing Syriza party will have to continue to push through unpopular reforms in order to keep his country afloat. Uncertainty is still rife and a slip-up could light the fuse on yet another crisis.
All told, despite some promising signs, growth in Europe remains low, unemployment remains high and optimism remains tepid.
China provided some of the most dramatic headlines of 2015 – from slow growth to the summer market meltdown that wiped out 40% of the value of the country’s stock market. After years of double digit growth for 30 years China posted just 6.8% growth in 2015, and could be set to see that figure drop to 6.3% according to the IMF. In 2016 China could remain on front pages around the world. Indeed, on the first day of trading in 2016 the Chinese stock market plunged 10% in a volatile start to the New Year.
Beijing remains committed to double per capita income between 2010 and 2020 but the country must balance long term reforms with short term stability. Interventions to avoid a market crash must be balanced against long term goals of liberalisation. Creating a more stable financial system, while mitigating slower growth will be a challenge to say the least. China’s economic performance will have a huge impact on the global economy – lets hope it is a positive one.
In South America, Brazil will be hosting the 2016 Olympics. Like the Fifa World Cup in 2014 the event is already being marred by protests and is woefully behind schedule. Even if the Olympics exceed expectations the country is still heading towards its worst recession since 1901, and could shrink as much as 3%, comparable to economic performance in 2015. The country’s debt was downgraded to junk status in December of 2015, the finance minister quit in frustration after less than a year on the job, and President Rousseff narrowly avoided impeachment for a corruption scandal involving the country’s state-owned oil company. Despite its enviable inclusion amongst the BRICS, Brazil has failed to live up to the high hopes once held for these developing countries, and 2016 will continue to be a difficult time.
Brazil’s regional rival Argentina meanwhile, seem poised to tackle deep seated economic issues with a new government. After 12 years of populist policies and inflation of around 30%, President Macri intends to remove currency controls which could devalue the peso by as much as 60%, deregulating the economy and attracting private sector investment. The incoming president, however, will have to contend with a legislature that remains loyal to his predecessor.
Canada’s housing market
Canada’s housing market exceeded expectations in 2015. The 7% growth even caused concern to some commentators who feared the emergence of a bubble, especially in major cities like Toronto, Montreal and Vancouver. New regulations designed to strengthen the security of the housing market in Vancouver and Toronto, combined with rising mortgage prices (which will also increase mortgage costs to 750 000 people renewing their mortgages) will help to alleviate concerns of a housing bubble.
Overall 2016 will likely see the red hot property market finally begin to cool. The Canadian Real Estate Association forecasting that home prices will increase just 1.4% in 2016 on average. House prices outside of Toronto and Vancouver could be set to fall by as much as 5%. In Alberta and Saskatchewan the collapse of oil prices will prove to be a serious test of the housing market.
Oil made headlines around the world in 2015 and particularly in Canada. The loonie’s low value, layoffs out west and Canada’s overall weak economic performance can all be traced to oil. In 2015 the TSX energy subindex collapsed by more than 50% since oil prices began to drop 18 months ago. In 2016 oil prices will not recover significantly. Moody’s, a credit rating agency, predicts that oil will average just $40 a barrel in the coming year. Layoffs in Alberta and Saskatchewan look set to continue, and the knock on effect of a hurting oil industry could continue to hold Canada’s economy back. Alberta, long used to the revenue produced from oil, is predicted to run a $6.1 billion deficit.
Exports and Manufacturing
Low oil means a low loonie and a low loonie, combined with America’s economic recovery should lead to greater exports and rejuvenation of Canadian manufacturing. This was the theory for 2015, and it remains the view of optimists for 2016, but the numbers tell a different story. Exports (even excluding energy-exports) actually decreased in 2015 (by 4% as of October 2015). Manufacturing in Canada may also continue to struggle, even with a low loonie, as the tar sands consumed $30 billion worth of Canadian manufactured goods per year in better times. A low loonie will also likely increase everyday expenses for Canadians as American imports will cost more. Even a proposed bridge from Windsor to Detroit could cost an extra $3.5 billion due to the poor exchange rate.
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