2016 predictions: Women in charge, reversal of fortunes, and Brexit?
After summing up the successes and failures of my last years' predictions in the previous post, it's time to make new ones. Each year the same; I look ahead and try to anticipate the most important economic and political outcomes on a national, regional, and global scale. I tend to be quite precise (see my track record), but I always manage to overlook the importance of some events (like the Ukrainian crisis in my predictions for 2014, or the refugee crisis for 2015).
For the upcoming year one of the arcs will be 'Women in charge'. Why such a title? Well, primarily because by the end of next year we could have 5 out 10 most powerful political positions in the world held by women.
Angela Merkel, the EU (German) Chancellor, Christine Lagarde, Director of the IMF, and Janet Yellen, the Chairman of the Fed, could be joined by Hilary Clinton as the next President of the United States, and quite possibly Irina Bokova as the Secretary General of the United Nations (in both cases, this would be the first time in history - the same was true for all three aforementioned positions - IMF, Fed and Germany never had a women in charge before). I'll revisit Hilary's chances below, and as for the UN, it is increasingly likely that the next Secretary General should come from Eastern Europe, from which there are several strong candidates, but Ms Bokova, currently the director general of UNESCO, is the front-runner.
Digression: You're probably wondering which are the other 5 most powerful political positions? By looking at the Forbes list and rearranging for rich entrepreneurs and my own personal opinion (e.g. neither Lagarde or Ban Ki Moon are in the Forbes top 10), I would conclude the list with the following names: The Presidents of Russia and China, Vladimir Putin and Xi Jinping, Pope Francis, ECB President Mario Draghi, and UK PM David Cameron. For the later two it's possible to imagine a woman in charge (the UK already had it), while for the former three it's quite difficult, not to say impossible (particularly for the Church, but that's by law).
What does the 'reversal of fortunes' in the title stand for? In 2016, the developed (rich) world will overtake the developing (emerging) world in their contribution to global GDP growth. This is unfortunate for the emerging markets, as they are still quite far from achieving convergence in living standards, but there is no doubt that the growth in the West will be much stronger next year. Coupled with further interest rate increases from the Fed, the emerging countries are facing tough times. For some of them the price of oil and commodities will add to these worries (Brazil, Russia, Argentina, Venezuela), but don't expect the oil prices to go back to $60 next year. They are much more likely to stay below $50 for another year.
As always, we'll go issue by issue, country by country, where I'll give predictions on both the economic recovery and political changes.
New interest rate increases. The Fed said it will continue with rate rises in 2016. It's possible to see this already in March, but by the end of the year it will raise interest rates again at least once. I can say this with a 90% probability. The only reason as to why it wouldn't raise rates again would be a recession in China which could trigger a strong spillover effect (not as strong as the one triggered by the US financial crisis, but still strong enough to unsettle markets). However I don't see this likely to happen in 2016. There will be more on China below, but to sum up, they are likely to achieve only a slowdown in growth, not a recession.
The Bank of England most likely will not follow in the footsteps of the Fed. In addition to their governor Mark Carney stating that interest rates will be "low for long", the government is still engaged with deficit reduction, meaning that we shouldn't expect the central bank to react to an overheating economy, when there really isn't one. The same issue is with the Eurozone and Japan, which are both facing very fragile growth rates. For that reason I don't see neither the ECB nor the Bank of Japan increasing interest rates next year. The ECB will, however, continue with QE even beyond September 2016.
This year will be only slightly better than the last one. As I've pointed out many times on the blog, Europe is facing it's own Japanese-style decade-long stagnation. This will of course vary from country to country (at the moment Ireland, UK, and the Eastern countries are driving up the average), but in general the climate will be a slow, long recovery process that will resemble more a stagnation than a proper US-style recovery. This will go on for years to come, despite the notable QE efforts from the ECB. Next year I estimate the average growth rate around 1.8% (+-0.2). I also expect unemployment to finally start going down across the EU. Not by much, but enough to be noticeable.
The biggest risk for recovery will again be political. The question of a British exit from the EU, in addition to the refugee crisis that will again pick up coming spring, will both worsen the recovery outlook of its economy, and the strength of its currency. The refugee crisis will be the biggest challenge. Particularly for Germany and its chancellor Angela Merkel. However with the German economy growing more strongly than this year, I feel that both Merkel and the country will endure and pass this test.
The "it" country in terms of GDP growth will again be Ireland. This time around 5% GDP growth. The worst performer will be Greece. Very likely to be negative in the first two quarters, and then a slight rebound by the end of the year. However this won't be enough to achieve an overall positive GDP growth rate for 2016.
Britain won't leave the EU, not this year nor the next one
By far the most important issue in the UK next year will be the EU referendum and Cameron's renegotiation of terms with the EU. Two predictions are necessary here: (1) Will the referendum be held already by the end of 2016, or will it be in 2017 as previously expected, and (2) Will Britain leave the EU? I will go on a limb and say that the referendum will be held by the end of the year, and that Britain will NOT leave the EU. The Brits are far too rational to do it. Immigration and likewise arguments aside, there is simply too much to lose from isolation outside the EU. Britain is nowhere near as economically powerful on its own like the US, China, or Russia. Each of these three superpowers has an endowment that Britain simply cannot emulate except as a part of the EU - Russia is rich in natural resources (land), China in labor, and the US in capital (and science & technology). The argument on British strength outside the Union vastly overestimates its capacities and its international reputation. In purely economic terms there isn't a single reason to opt out, and the voters will recognize this.
Furthermore, a Brexit would trigger almost immediately another Scottish referendum, which, this time, could end differently than the first one in 2014. The Scotts will surely vote to leave the UK if Britain leaves the EU. For all those centrist British nationalists this is unacceptable, which is why they are more likely to sustain from voting for a Brexit. I give this outcome a 90% probability, however I'm not entirely sure that the referendum will be held in 2016, so I give this scenario a 60% chance. Either way, whenever it's held, in one year or the next, Britain will not leave the EU.
The economy looks really good. It will continue to perform well in 2016. Further interest rate increases from the Fed will strengthen the dollar, but this won't hurt US exporters too much (after all, the demand for both dollars and US exports is driving dollar appreciation more than any other factor, so in this case currency appreciation is not a bad thing for exports). Economic growth will be slightly higher than this year, I estimate around 2.7% (+- 0.3). Unemployment will drop down to 5%, inflation will remain low, as will the wage growth.
As for the political situation in the US, this is one of the toughest predictions of the year. Let's start with the primaries. Hilary Clinton will surely win the Democratic nomination, there is no stopping her. I estimate this at a high 90% probability at the moment. Recall however that in 2007 Hilary was also the front-runner for the Democratic ticket, only to be beaten by the outsider and later President Barack Obama. This time however her party hasn't really put up a fight (even Vice-President Biden opted out of the race not to hurt her chances), so her nomination is virtually unopposed.
For the Republicans it might as well be a coin toss. At the moment there are at least 5 names being thrown around as likely candidates, despite Trump's gravity-defining polls putting him in the lead for more than 5 months by now. The reason why Trump is rated so high for so long was well summarized by Nate Silver - Trump's media coverage outshines all other candidates by a high margin. Out of all Republicans in the Presidential race, Trump's name came out 70% of the time in the media. This will help him throughout next year as well. If Trump is good at anything apart from real estate, its show-business. And he knows how to ride this wave. This is why I give him a slight edge over all others. At this moment, I will assign the following probabilities (this will probably change throughout the year, and I will keep updating my predictions on the Good Judgment Project website): Trump 39%, Rubio 35%, Cruz 15%, Bush 10%, someone else less than 1%. The tossups at RealClearPolitics show that Clinton beats every Republican candidate except for Rubio. I give her a 52-48% probability over Rubio, and 55-45% over Trump. It will be a very interesting political year!Russia
Despite all its troubles Russia could be growing again in 2016, after sustaining quite a shock due to low oil prices and EU sanctions last year. Both of these factors will continue to pile misery, as they will surely put a dent in living standards by entailing further pressures on inflation and a weakening currency. Putin, however, won't mind. He is playing a very risky strategy: going all-in at Syria and the fight against terrorism, whilst maintaining a hard position over Ukraine, hoping to raise enough nationalist sentiment to overshadow the economic downturn. If the economy recovers and achieves positive growth next year, this will further strengthen his position. He is counting on it, and might just get away with it. I predict a very modest 0.6% growth rate, although the margin of error is high, so this might still end in a recession. Even if it does, it won't hurt Putin politically. At least not in 2016.
Abenomics has failed, this is almost certain. It failed to achieve stronger economic growth (it's still below 1%), it crippled the economy by raising consumption tax (the government announced to do this again in 2017), its pro-business reforms were dropped, and it failed to reach the 2% inflation target (it's still around zero, mostly due to low oil prices). It did however succeed in halting the debt-to-GDP growth, but for a true change (which Abe was advertising), this 246% ratio must start declining. Stopping its growth with higher taxes is neither enough, nor is it doing any good for the economy. I predict a 0.8% (+-0.3) growth rate for Japan in 2016.
China is in a slowdown, this is now fairly obvious. It is still not in a recession, nor will it be in one next year, as some might suggest, but the estimated 6.5% (+-0.4) growth for next year is a worrying sign for China. As a response two things are likely (1) currency devaluation against the dollar: the renminbi will very likely go down, despite many sings that it really shouldn't (e.g. the dollar growing stronger, huge foreign currency reserves, big trade surplus, etc.), and (2) interest rate cuts from the central bank. China will do a lot policy-wise to keep growth rates high. Unfortunately this will only inflate its bubble further. When the bubble finally bursts all these policy mistakes will come back to haunt them. China's double-digit growth decades are over. It has successfully converged to a higher level of development. Now it must learn not to be reckless with its economy, pumping it up with hot air when such a thing isn't really necessary. According to its new five-year plan, expected in March, this is unlikely.
India will now take the lead as the fastest growing economy. Moldi's government failed to meet expectations last year, but they were still lucky enough to prosper from low oil prices. This year we can expect more of the same, as oil prices will remain low, and as the government pushes a few large infrastructural projects. This will keep growth above 7%, perhaps even slightly short of 8%.
Two main (global) events: the Olympics in Rio in August, and the Euro football tournament in France, in June. For the Olympics expect a lot more fuss in the buildup (protests against President Rousseff), than at the tournament itself. As every Olympic games it will be a spectacle. Brazil did quite well two years ago when it hosted the football World Cup (even though it also faced protests and discontent), and I expect nothing to go wrong in August either. Nor do I expect any terrorist attacks. I know, this is a highly unexpected event in itself and global sporting events like these often attract the wrong kind of attention, but with security standards as high as they get (particularly in France), I don't believe that a terrorist attack will occur.
As for the sporting results, the medal count at the Olympics will be as expected: US first, China second, Russia third. At the Euro in France, I have a tie between Belgium and Germany (to each a 40% chance). Spain and France could also do good (to each slightly less than 10%), but the problem with the prediction in this case is the new structure of the competition. There are 24 teams (more than ever) meaning that four third-seeded teams out of six will progress to the next stage. This is just wrong. It embodies the European no-one-is-a-loser mentality, as opposed to the US there-is-only-one-winner. Newsflash for UEFA: in a tournament there can only be one winner. Drop the charade and give us back the old Euro tournament!