Smoother sailing for G7, commodities lower

Having entered the New Year, PwC’s economists made their predictions for 2016, expecting smoother sailing for the G7 economies, that geopolitics, rather than economics, will be at the top of policymakers’ agendas, and that commodity prices will remain lower for longer.

The G7 is expected to grow faster than 2% in GDPweighted terms, which would be the fastest pace since 2010. In contrast, the E7 emerging economies will grow slower than their trend rate (but still faster than the G7). Within the E7, the Brazilian and Russian economies will contract and China will slow, but India will be the star performer.

Three geopolitical issues will continue to dominate the news headlines. First, the migrant crisis in Europe, which may slow down in the winter, but could flare up again in the spring. Second, the response of the international community to the crisis in the Middle East. Third, the referendum on the fate of the UK’s membership of the European Union.

As for commodity prices remaining lower, this will be good news for most businesses, households and policymakers in commodity importing economies, but a challenge for countries that rely heavily on commodity exports.

PwC economists also provide more detailed predictions for the year ahead, as summarised by UK Chief Economist, John Hawksworth:

“We expect the US recovery to switch into a higher gear in 2016, while the UK will also enjoy continued consumerled growth. We should also see at least the beginning of the end of the Eurozone crisis. The once-mighty BRICs (Brazil, Russia, India, China), however, will have another tough year in 2016, with the notable exception of India.”

The other preductions by PwC economists suggest:

The US will top the G7 GDP growth league table -

The US economy will grow by almost 3% and so contribute to around two-thirds of overall G7 growth in 2016. It is also expected that the US will continue to create an average of around 200,000 jobs per month, helping to sustain consumer spending growth. US and UK interest rates to rise in 2016: In December last year, the Fed led the way with its first rate increase since 2006. PwC economists expect it to continue to raise rates, albeit only gradually, in 2016. Barring any major adverse global shocks, it is expected that the Bank of England will follow suit at some point later in 2016. In contrast with the US and the UK, the European Central Bank, the Bank of Japan and the People’s Bank of China are expected to maintain an accommodative monetary policy stance in 2016.

The

end

of

the Eurozone

crisis

- The peripheral economies will grow faster than the core economies for the second year in a row. The Greek crisis could flare up again but this should not lead to contagion to the rest of the bloc, which is why PwC economists expect 2016 to mark at least the beginning of the end of the wider Eurozone financial crisis. With most imbalances in peripheral economies under control and structural reforms underway, it is likely that Eurozone GDP will expand by around 1.6% in 2016 – its fastest growth rate since 2011.

India will be the star performer amongst the E7

- For the second year in a row, we expect India to grow faster than China, expanding by around 7.7% in real terms. Chinese GDP growth will ease to 6.5%: China’s economic slowdown looks set to continue with rebalancing now underway. Growth in manufacturing and exports will continue to slow gradually.

However, Chinese business leaders will continue to move into higher value added areas of manufacturing. SubSaharan Africa (SSA) will add ‘an Australia’ to the world’s population: SSA’s population will grow by more than 25 million people in 2016, which is larger than the entire population of Australia. This will be in line with past trends as SSA has added more than 20 million people per year to its population in every year since 2006. At a country level, just under 20% of SSA’s population growth in 2016 will be driven by Nigeria alone.