For better or worse: economic forecast for 2016

A week into 2016 and the financial markets are off to a less than prosperous start; two trading suspensions on the Chinese markets, the halting of diplomatic relations between two major oil producers and a spate of negative trading updates have done nothing to elevate investor sentiment. But is this gloomy outlook it for the year, or is there a chance to turn it around?

China is one of the biggest influences on the global economy, and according to Dafydd Davies, partner at Charles Hanover Investments, the forecast isn’t looking good:

“Structural changes in China are likely to be the most detrimental factor for equity markets, although not so much the fundamental changes themselves but negative sentiment they create.”

China have implemented several changes since crises over the summer of last year sent markets plunging – including several devaluations of the yuan and the perhaps ill-advised decision to bring in a ‘circuit-breaker’, designed to suspend the markets should they fall over 7 percent. What is certain is that Beijing’s attempts to control volatility in the markets will continue, with uncertain consequences.

The oil sector’s start to 2016 wasn’t much better than China’s – prices hit 11-year lows at the beginning of the week after Saudi Arabia’s execution of a prominent Shia clerk caused Iran to cut diplomatic ties. Exacerbated tension between the two countries makes a much-needed agreement to curb output look more and more unlikely.

Dafydd Davies comments: “With the $30 mark fast approaching, we expect to see some capitulation over the coming months as Western producers have to keep producing to pay debt, and Middle Eastern producers continue to support government spending.”

Looking towards the UK, the biggest issue on the country’s agenda is the much-anticipated interest rate rise. Now that the Federal Reserve have taken the plunge and raised rates, the pressure is increasing on Bank of England chief Mark Carney to do the same. However he has repeatedly made it clear that the UK is in no hurry to follow suit – and with a strong of disappointing economic data, it seems unlikely rates will be raised until at least early 2017.

Miranda Wadham on 08/01/2016
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