What Economists Are Predicting For 2016

More of the Same or Surprising Changes?

What Economists Are Predicting For 2016
December 24, 2015

It has been a relatively rough year for the markets, thanks to slowing economic growth across the world (especially in China), low oil prices and the constant threat of an interest rate hike from the Fed that finally came to fruition. Will 2016 be another dose of the same, or should we expect greater growth? Could this be the year that the bear market finally arrives?

The International Monetary Fund (IMF) is still predicting global growth but cut the growth forecast to 3.6% for 2016, down 0.2% from the June forecast. The slowdown in China's growth was a main driver for the downgrade, and that slowdown is expected to continue. China's growth rate is predicted to drop below the government's 7% target to 6.3% in the upcoming year.

U.S. growth is expected to stay in the 2.2% to 2.5% range, comparable to the 2.1% growth rate shown over the first three quarters of 2015. The 0.25% interest rate hike by the Federal Reserve is expected to contribute to a stronger dollar and make American exports more expensive — thus putting more pressure on corporate earnings.

A roundtable of economists complied by USA TODAY comes out on the side of growth, but not by much. They do not see signs of an upcoming recession or a bear market, but another 10% correction would not be a major surprise. That may be a good thing, as economic skepticism and concerns tend to bleed excessive optimism off the market and prevent a natural correction from blossoming into a bear market.

Those with less optimism see 2016 as 2015 revisited. Goldman Sachs Chief U.S. Equity Strategist David Kostin quips that "flat is the new up." In his view, the effects of the Fed's rate increases will offset slow economic growth. Stocks are already slightly overvalued as is, with the trailing price-to-earnings (P/E) ratios at 22.7 for both the NASDAQ and the S&P 500. Forward P/E ratios based on estimated earnings are above 17 for the S&P 500, indicating a broadly overextended market.

How about oil prices? They may not have hit bottom, according to the International Energy Agency (IEA). It is possible that we could see $30 per barrel oil in the early part of 2016 before prices begin to rebound. However, IEA predicts that they will stay unusually low throughout 2016 because of the massive oversupply and limited demand due to lower growth.

The unemployment rate finally managed to hit 5%, and according to compilations by Trading Economics, it is likely to hover around that rate throughout 2016. If so, wage pressures may not be sufficient enough to produce higher salaries and greater consumer demand.

Volatility is predicted to remain high, and that makes these predictions susceptible to change through any type of economic shock. Collective global unrest could easily affect aspects like consumer confidence and oil supplies, causing further market turmoil. Economic skepticism may be keeping the market tempered, but volatility is the downside of that skepticism.

There may be no consensus, but most predictions are on the positive side for the 2016 economy; it is just a question of degree. Economists are generally optimistic, with reservations — but isn't that the standard mindset of economists?


Photo ©iStock.com/Sadeugra


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