Economic and financial market outlook 2016

Eurozone economy set to stabilize further in 2016There is every reason to be upbeat about the economic outlook 2016. Despite sliding commodity prices, deflationary risks in Europe are receding further. Businesses and consumers are substantially more optimistic than one, two years ago. The domestic economy has sparked into life, the low oil price is helping the economy and the number of jobs is rising sharply. “In 2016 the upswing in the eurozone will not only gain momentum and breadth but also stability and thus become increasingly self-sustaining”, said Michael Heise, Chief Economist at Allianz. At 1.8% in 2016, the eurozone economy is likely to see somewhat stronger growth than in 2015 (+1.5%). This pace of expansion is likely to continue in 2017 as well.

The German economy continues to enjoy an ongoing upswing: Employment is rising in practically all major sectors, all expenditure components of GDP are recording growth. Further impetus is coming from ongoing ultra-loose monetary policy, fiscal measures (investment, income tax relief) and additional spending triggered by the influx of refugees. In addition, exporters are enjoying enhanced competitiveness on the back of the relatively weak euro. All told, we are expecting growth to firm up further next year. In 2016 gross domestic product is likely to increase by 2.2%, for 2017 we are penciling in growth of 1.9%.

In the USA growth in 2016 is set to come in at 2.5%, as in 2015. Growth in the emerging markets is likely to pick up again to 3.8% in 2016, up from 3.3% in 2015, largely due to the fact that the slump in Brazil and Russia will bottom out next year. Thanks to the policy stimulus, positive news from China is likely to be more frequent in 2016 even if officially recorded growth is set to ease a tad further. All told, world economic growth looks set to accelerate slightly to 2.8% in 2016.

But it should not be forgotten that the risks to our cautiously optimistic outlook are not negligible. The geopolitical situation is anything but stable, an escalation in the Middle East could deal a hefty blow to the global economy. Heise: “The geopolitical imponderables, the divergent monetary policies of the Fed and the ECB, the modest yield outlook in many asset classes and the large gap in emerging market performance suggest capital flows will be extremely volatile next year. Even if individual asset classes such as European equities doubtless offer upward potential, a one-way upwards trend on these markets is not on the cards. Next year is likely to see frequent swings on the financial markets. And probably the bond markets in particular.”

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