The Global Economy in 2016: Eight Fundamental Questions

As the year 2016 begins, it seems that a significant portion of political decision-making centers and international public opinion is primarily focused on geopolitical tensions, especially what is happening in the Middle East and North Africa, as well as the terrorist threats that, linked to events in these two regions, threaten many countries. However, the major doubts weighing on the global economy should not be overlooked, especially since severe economic shocks can become the source of new geopolitical tensions, just as such tensions can in turn create new economic crises. 1) What will be the growth of the global economy in 2016? The International Monetary Fund (IMF) in its report on the "World Economic Outlook," published last October, predicted an average global economic growth rate of 3.6 percent for 2016, which is not impressive overall. In this report, we see that the United States will lead with a growth rate of 2.6 percent this year among the seven major industrial powers (the United States, Canada, the United Kingdom, Germany, France, Italy, and Japan). In contrast, the Eurozone must settle for a growth rate of 1.5 percent, and Japan's growth rate will not exceed 0.6 percent. Emerging powers and developing countries are also expected to have a growth rate of 4.5 percent, significantly lower than their average growth rate from 2010 to 2013, according to the IMF's assessment in October 2016. We reiterate that these predictions were published three months ago. Recent assessments from IMF officials suggest that even these relatively weak growth rates may not be achievable this year. Just before the New Year, Christine Lagarde, the head of the IMF, described the global growth outlook for 2016 as "bleak" and justified her pessimism by citing the continued rise in interest rates in the U.S., the slowdown in growth in China, the deceleration of international trade, financial weaknesses in many countries, and the impact of falling commodity prices on developing countries. 2) Where is the U.S. Federal Reserve taking the global economy? In the last month of 2015, the U.S. Federal Reserve cautiously increased its base interest rate for the first time in about ten years, after months of hesitation, but at the same time conveyed the message to financial markets and economic players that this increase would continue gradually in 2016. This means that from now on, American banks will have to bear higher costs to borrow from the interbank market and will naturally demand higher interest rates for lending to consumers and investors. The decision by the U.S. central bank to raise the federal interest rate indicates the institution's confidence in the improvement of the country's economic situation and its final exit from the massive financial crisis that shook the world from 2007 to 2009. However, this decision also creates fears and tremors, and it seems that Ms. Lagarde, in her role as head of the most powerful international financial institution, has given credence to this fear by using the word "bleak" to describe the growth outlook for the New Year. In this context, Ms. Lagarde and her institution raise several questions: - Will the increase in interest rates in the U.S. cause the engine of economic growth in this country to stall? - Will countries and businesses that have borrowed from U.S. banks be able to easily bear the additional costs resulting from repaying their debts given the increase in interest rates in the world's largest economic power? - Now that interest rates in the U.S. are on the rise, will a larger volume of capital seeking higher returns head to this country from around the world? Is there not a risk that many countries, including emerging powers, will face massive capital outflows and exacerbate their problems? - Finally, will the increasing attractiveness of the U.S. market for floating capital accelerate the strengthening of the dollar against other currencies, with all the negative consequences this process may have for both the U.S. economy and other economies? 3) What position will the U.S. dollar hold in the international currency market? Economically, the rise in the dollar's exchange rate against many currencies, which began about two years ago, seems justified given the growth rate in the U.S. and the country's exit from an expansionary monetary policy. Of course, the annual growth rate of the U.S. (around 2.5 percent) is not particularly impressive compared to the boom periods before the 2007-2009 crisis. However, this not-so-impressive growth, when compared to the situation in other major industrial regions and the declining economic dynamism in many emerging powers, is at an acceptable level, which naturally helps strengthen the greenback. In terms of monetary policy, the U.S. Federal Reserve is abandoning its expansionary policy, while other central banks in major industrial powers have just begun to adopt this policy. In other words, just as U.S. monetary officials are forgoing the two levers of "quantitative easing" (mass purchases of government bonds by the Federal Reserve) and low interest rates, their counterparts, especially in the European Central Bank, have begun to utilize these two levers. In this context, the strengthening of the U.S. dollar appears natural. However, this event, which is likely to continue in 2016, raises questions: - Given the negative impact of a strong dollar on the competitiveness of U.S. goods in global markets, how far can American exporters withstand the strengthening of this currency? Will the strengthening of the dollar, which signals the exit of the U.S. economy from the financial crisis, not become a factor leading to an increase in the trade deficit and weakening of the economy of this country? - Emerging powers, especially businesses from these countries, have largely borrowed in dollars. Now that the dollar's exchange rate against other currencies has risen, the dollar debts of these businesses, when calculated in their local currencies, have sometimes increased by 20 to 30 percent. Will this heavy burden, which will exacerbate the problems of these countries, not harm the global economy as a whole? 4) What is the situation in China? For over three decades, China has transformed into the world's factory with an average annual growth rate of about 9 percent and has played a very important role in global economic developments. As the "Middle Empire" became the world's largest exporter of goods, international trade was transformed. The influx of cheap Chinese goods into various markets significantly lowered inflation worldwide. Ultimately, China's increasing demand for raw materials, especially energy, has significantly and persistently raised the demand and prices of these materials. This long period seems to be coming to an end. China's official growth rate has dropped below 7 percent, but many observers of Chinese issues estimate this growth to be between 4 to 5 percent. It seems certain that China is transforming the foundations of its development, and as a result, its relations with the international economic community are also changing. If the very rapid economic growth of the Yellow Dragon over the past three decades was largely based on massive investment and exports, the Chinese appear to be turning to a new model in which domestic consumption gradually becomes the main engine of their economic development. This new model tends to increase wages and protect the environment, especially through changes in energy consumption. China is moving out of the status of "the world's factory" and is transferring part of its production capacities to poorer Asian neighbors or to Africa. The consequences of this transformation will naturally extend far beyond China's borders and impact the entire global economy. One of these consequences is the decline in raw material prices, including oil, over the past two years. The fall in the prices of several mineral and agricultural raw materials over these two years has many reasons, but one of the most important is the slowdown in China's growth and the gradual transformation of its development model. The results of this trend are likely to be felt more in 2016. 5) Will the fall in oil prices continue? This question has been repeated hundreds of times in major international media over the past year and a half. If we pose this question in the context of two years, five years, and beyond, the answer must be accompanied by dozens of ifs and whys and presented in the form of multiple scenarios. However, if we only limit ourselves to 2016, speculation becomes easier. We know that over the past eighteen months, the price of a barrel of oil has fallen by one-third. In the first half of 2014, when oil prices above one hundred dollars became a normal phenomenon, if an analyst had predicted that the price of the OPEC oil basket would fall below thirty dollars a barrel by the end of 2015, they would likely have been accused of insanity. Today, cheap oil has become a normal phenomenon, and many analysts are competing to predict its fall. Leaving that aside, it is likely not wrong to say that the oil market will continue to face tough times in the new calendar year, and at least until the end of 2016, the likelihood that a knot in its tangled affairs will be untied is not very high. In other words, those oil-exporting countries that set their budgets for the coming year based on oil prices below thirty dollars a barrel will not be accused of excessive pessimism or caution. Enduring this situation over the next twelve months will not be difficult for wealthy Arab countries in the Persian Gulf, which have vast foreign reserves. In contrast, there are oil-exporting countries for which the continuation of the current situation could lead them to face major political and social crises. Vladimir Putin's Russia, which also bears international sanctions, will not easily pass through the oil crisis. In some oil-rich countries, ruling regimes have only prevented social and political explosions by relying on oil dollars. Algeria in North Africa is one of these countries, and if it faces such explosions, it will add a new hell to the existing hell in Libya. Another country shaken by cheap oil is Venezuela, a country with the highest oil reserves in the world, which is currently unable to meet its international financial obligations due to the policies of Hugo Chavez and his successor and is at risk of declaring bankruptcy. 6) What will the continuation and intensification of terrorist attacks do to the global economy? The wave of terrorism has expanded beyond a few countries in recent years and has taken on a global dimension. In relation to the expansion and intensification of terrorist operations worldwide, the economic consequences cannot be overlooked. One of the main objectives of terrorist organizations is to create instability in the economies of the countries targeted by their attacks. Developing countries like Tunisia or Egypt lose their attractiveness in one of the most dynamic sectors of their economies, which is tourism, due to the fear generated by terrorist violence, leaving billions of dollars of investment in this sector idle and resulting in the loss of thousands of jobs. In wealthy countries like the U.S. and France, terrorism strikes at the engines of growth by instilling fear in consumers and investors. Assessing the direct cost of a terrorist attack is not impossible. However, estimating the indirect costs of such an attack in the medium and long term is a very complex task. For example, the events of September 11, 2001, beyond the physical destruction they caused, eliminated a vast amount of human capital, imposed billions of dollars in costs for anti-terrorism preventive measures on taxpayers and businesses, and led to the devastating wars in Afghanistan and Iraq. After the terrorist disaster of November 13, Paris faced a sharp decline in consumption for a week or two. Cafés, concert halls, and theaters were empty, and many foreigners left this heavily touristic city, leaving hotels half-empty. Fortunately, the economic consequences of terrorism are not yet such that we can speak of a disaster. However, the painful question inevitably arises: if in 2016, linked to the expansion of war in the Middle East, terrorist attacks increase, what economic damages will the victim countries face? 7) What will be the potential consequences of the United Kingdom's exit from the European Union? About three years ago, David Cameron, the Prime Minister of the UK, decided to put the issue of his country's continued membership in the European Union to a referendum under pressure from anti-EU sentiments, confident that the opponents of Europe would be in the minority. Today, with just a few months left until the referendum, it is clear that the English nation is divided into two roughly equal camps on this issue, and even based on some assessments, supporters of the UK's exit from the EU currently have the upper hand. Approximately forty-two years after the UK joined the European Community (which later became the European Union), the likelihood that the world's largest economic integration bloc will lose one of its most important foundations is increasing. From this perspective, one can say that 2016 will be a decisive year for Europe. In recent years, the European Union has faced severe shocks, with the Greek crisis being the most significant. We have not forgotten that under the pressure of this crisis, the eurozone came close to collapse.