Star Wars, El Nino, and the Global Economy

https://cnb.com/global-perspectives It’s that time of the year when we leapfrog over the December holidays and discuss what the year ahead holds for us. We are doing this in two parts this year – discussing “Asia and Emerging Markets” this week and “Canada and Europe” next week. Critical to both analyses though, is the path of the U.S. economy and how quickly the Fed hikes rates. As it is every year, market watchers easily know the outline of the global economic essay that will be written in 2016. It’s more a question of how will it fill out. It’s also an expectations game – just like the new Star Wars and El Nino, everyone believes they will be big; it’s a matter of how big. It’s a similar guessing game for the 2016 global economy. Unlike the new movie and impending rainstorms though, no one expects 2016 to be a blockbuster year for the global economy, but it will not be bad either. The IMF is forecasting 3.6% global growth in 2016, better than 2015’s 3.1% but very close to 3.5% average we have seen from 1980 through 2014. Asia is a question that boils down to two factors – the price of commodities and just how slow China will grow. On the former question, forecasts are very scattered, but the path of least resistance is range bound trading. If we have that and China continues its reform path, as we believe it will, Asia is likely to do reasonably well next year. Emerging markets on the other hand, are struggling under a mountain of debt denominated in U.S. Dollar, which, in our view, will likely just get more expensive to service. Emerging markets will continue to be very bifurcated though, with countries like Brazil only repeating horrifying economic performances while we quietly see significant advancement in other countries like India and Mexico. Our view: The lynchpin remains commodities, and forecasting that trend is notoriously difficult. A recent report noted that stable oil prices will not only result in decent growth, but will trigger inflation data to the upside, which could accelerate the pace of Fed rate hikes. While that is fine for the U.S, it would lead to greater U.S. dollar strength and more capital flight from emerging markets, which would then be facing a really tough year.