New Year 2016: Rate hikes, China growth and lower oil prices - the business outlook

As we enter 2016, after a mixed year of market turmoil (see oil and China) and economic recovery (see the US and UK), here is a look ahead at what things may hold for business and the economy.

Interest rates: hike or hold?

Both the US and UK economies are mending strongly and have reached the point where central bank policymakers want to bring interest rates back into the realm of normality after holding them down for so long. They are widely expected to hike rates in 2016, though only incrementally. The US Fed already made its first move on December 16, the first rate hike since 2006. Higher rates will help mitigate the risk of credit bubbles forming while the economy booms by making borrowing more expensive. But central banks in the eurozone and Japan are still contending with weak economies so need to keep the money tap flowing -- and possibly even make the flow even faster -- to support bank lending and economic growth. "Looking towards 2016, global central bank divergence is expected to be a dominant theme," said David Absolon, investment director at Heartwood Investment Management, in his fixed income outlook. "We expect the US economy to retain its role as the engine of global growth in 2016. However, growth is likely to remain modest compared with previous economic cycles, allowing the Federal Reserve to proceed on a very gradual tightening path. The Bank of England is likely to follow the Fed's lead and initiate its tightening policy later in 2016, in contrast to Europe and Japan, where ongoing central bank stimulus is expected to support those economies' mild recoveries."

Oil prices and other commodities

Oil prices were in freefall, down from around $120 (£79, €110) a barrel of Brent crude in July 2014 to below $40 in December 2015, amid a glut in supply. Counterintuitively, OPEC countries maintained their oil output to suppress its price further, rather than cut output to drive oil prices up. Poorer oil producers, such as Venezuela and Nigeria, suffered badly. This was to put pressure on the booming shale oil industry in the US in the hope it would suffer and so return OPEC to dominance in the industry. With little to suggest any radical changes in demand or supply -- there is expected to be a little more of both -- oil prices are forecast to remain suppressed in 2016. And Brent crude could well tumble below $30 a barrel unless production is cut or demand slows markedly.

As for commodities more generally, prices are set to rise more slowly than anticipated across the board. The World Bank revised down its commodities estimates for 2016. "There are sufficient inventories of oil and other commodities and demand is weak, especially for industrial commodities, which is why prices may stay persistently low," said John Baffes, senior economist at the World Bank and lead author of its Commodity Markets Outlook. Headwinds include a strong US dollar, oversupply and weakening demand from the likes of China.

Slower growth in China

Within a matter of years, China will overtake the US to become the world's largest economy. Its powerhouse status means the world economy relies on its health. China imports and exports vast amounts. So when there are negative shocks in China, such as the eruption of its Shanghai stock exchange in summer 2015, reverberations are felt the world over. China's economic growth has been slowing in recent years more quickly than expected amid government reforms and efforts to wean itself off of reliance on heavy public investment. China has undershot its growth forecasts for some time. Now its central bank has cut its 2016 growth forecast from 7% to 6.9%. But Oxford Economics forecasts this growth to be much slower still, coming in at 6.3% in 2016, weighed down by slowing consumption growth slows because of lower wage rises, and a slump in construction. And UBS is warning to keep an eye on Chinese housing indicators over the coming year -- new housing starts by builders were down 25% year-on-year in October 2015, for example.

Emerging market debt

The IMF sounded the alarm on a giant stockpile of debt in emerging markets -- $18tn, to be precise, with $3tn of that tagged as "overborrowing" -- after corporates gorged on cheap money in low-rate western markets. They borrowed heavily to invest, which has helped fuel their rapid growth. But western central banks will very soon start raising interest rates. The first expected is the US Federal Reserve, followed by the Bank of England and, eventually, the European Central Bank. When rates rise, so will debt repayment costs. This is a big risk for corporates in emerging markets who have loaded up on cheap debt -- and as rates rise in 2016, we may see a few defaults as a result. Back in October 2015, Philip Shaw, chief economist at Investec Economics, told IBTimes UK "what warrants especially close attention is the fact that emerging market economies are weakening, in particular those with a high concentration of commodities exports, and therefore that heightens the possible risks coming from emerging market debt." Will 2016 be the year that emerging market debt blows up?

Global economic growth will be 'steady but sluggish'

According to Oxford Economics:

World growth has been stuck in a sluggish phase since 2011 and we expect this to continue in 2016. Growth prospects for 2016 have deteriorated during 2015, in particular due to poor performances in key emerging markets (EMs). The advanced economies have generally performed a bit better, helped by lower oil prices and we expect this to continue in 2016. But with EM growth still soft we expect world GDP to expand by only 2.6% next year, little changed from 2015's 2.5% rise and below consensus (and the long-term average) of 2.8% growth.

UBS:

We now expect the global economy to grow 3.3% during 2016 (revised down recently from 3.4% due to revisions from Brazil), 3.4% in 2017 versus an estimated 3.1% this year. This is roughly consensus. Beneath this dull headline lie significant differences for the larger regions. The US and Europe appear set for modestly stronger growth whereas Asia, led by China, appears headed for weaker growth. The big difference between these regions is the degree to which private sector balance sheets have deleveraged. The US has deleveraged the most since the global crisis, Europe less so, and China not at all. Hence, domestic demand in the latter slows and improves in the former. Finally, this scenario should allow global trade to improve a bit over 2015, but we expect it to remain weak relative to pre-crisis trends and to global manufacturing capacity.

And Investec Economics:

Monetary policy divergence will be a key theme for the global economy next year. The US looks set to see rate rises, albeit gradual ones. Other central banks, such as the Bank of England, are likely to follow the Fed's lead. The Eurozone however, is set to remain on a stimulus footing, as will many emerging market economies, where growth prospects are rather soft. These dynamics could see; more downward pressure on the euro, further stress in some EM economies and on their currencies, and continued weakness in commodity prices. However, we think these forces will be kept largely in check next year – we actually see the euro rising, pressure on EMs abating, commodity prices recovering a little and global growth generally on a more even keel.