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Home » How has the year 2016 been for the World Economy

How has the year 2016 been for the World Economy

By Richard Daniels Reading Time: 5 mins
Updated February 8, 2017

How has the year 2016 been for the World Economy? Large economic changes occurred in 2016, such as central bank monetary policies and the rise in raw materials (mainly oil). There have also been major political changes that have affected markets. Just two days after the end of the year we analyze the great economic changes that have taken place this year.

In an increasingly globalized environment, the situation is always changing and markets constantly react to many factors, but the trajectory of the economy worldwide in 2016 seems to show a new direction: more volatile markets, with more opportunities but also more risk, in a context of more uncertain and less regional integration, with the return of international relations inflation on the horizon. All these changes have made the economic landscape inherited from the previous year almost unrecognizable, and also allow us to intuit the challenges of the next:

Political Uncertainty, Protagonist in the Markets

2016 has been characterized, among other things, by a shift in the political scene that has had a profound impact on the world economy. It is important to remember that in recent decades, economic policies in the developed world (especially in Europe and the United States) seemed oriented one freer trade between countries.

This expansion of the free movement of goods, people and capital is framed in turn in a broader (the globalization ), but in Europe has specifically resulted in economic integration, namely the progressive convergence of all economies in the Old Continent through Transfer of sovereignty in favor of the Community authorities. In other parts of the world there are also similar movements, not to the degree of integration of the European Union but forming important regional economic blocs (NAFTA, Mercosur, etc.).

However, the decision of the British to leave the EU in June and the election of Donald Trump as president of the United States opened a new stage of uncertainty. For the first time since the end of the Cold War, a country opted to break with the European integration project, seeking to recover lost sovereignty and reversing the trend of the last decades.

In the United States, Trump’s presidential victory seems to reinforce a similar sentiment on the other side of the Atlantic that Brexit inspired: abandon regional economic integration, foster national production, and return to bilateralism as a means of relating to the rest of the world.

The first consequence of this political shift has been, of course, the breaking of agreements seeking to enhance regional integration through the creation of large free trade areas . Thus, in just a few months the two treaties of commerce more ambitious international (the Transpacific Agreement and TTIP) have announced their failure: first, because of the US withdrawal promised by Trump, while the second even he managed to finish the negotiations before the generated doubts and the overwhelming rejection of public opinion.

The effect of these events has become so broad that even in other parts of the world (such as Argentina or Brazil) political change also appears to coincide with a relative neglect of regional integration projects and joint trade relations through one new network of bilateral agreements.

Furthermore, errors in the polls and surprise generated by political developments in the markets have also affected the foreign exchange market. The pound, for example, has gone from trading around 1.35 euros to 1.17 (representing a depreciation of 13% throughout the year), with falls of up to 9% in just one day after The announcement of Brexit.

In the United States the effect seems to be the opposite: after a brief period of volatility after the elections, the dollar has been strengthened since late 2016 and traded up 5% against the euro. Finally, the currency community has also been seriously affected, since the political factor mentioned above and continuity of monetary expansion ECB have led to a moderate depreciation, which in turn has dampened the strengthening against the pound and strengthened the fall against the dollar.

Oil Recovers

Oil, for its part, has also been a major player in the world economy in 2016. After years of steady increases (with the Brent barrel rising above $ 145 in 2008), oil appeared to have stabilized around 100 dollars until in mid-2014 began to undergo an unprecedented series of falls.

That year the Brent lost almost half its value, but in 2015 the spiral downward continued to a record low of $ 35 with a profound impact on the world economy. However, in the first six months of this year there has been a strong recovery in prices stabilizing around $ 50 but with a notable increase in volatility.

The end of Coordination between Central Banks

Another outstanding economic fact is undoubtedly the end of coordination (at least as understood so far) between the US and European monetary authorities. In recent decades, despite the autonomy of central banks, many of the most important monetary decisions are taken in a coordinated manner on both sides of the Atlantic. This is what was done when interest rates rose in the years immediately preceding the crisis, and also when they fell after it: in both cases the measures taken in the United States and Europe shared the same restrictive and expansive sign, respectively.

This year, however, the Federal Reserve has decided to start with a gradual rise in interest rates, while the European Central Bank ‘s has lowered to 0% and expanded its plans QE. Possibly the decision is reasonable: the end of the day , the US seems recovered from the crisis, it is close to full employment and is beginning to have some problems with inflation, while Europe continues to suffer unemployment rates are too high and enjoy stability of prices. However, the facts are not surprising, since for the first time in many years the monetary cycle in the United States is opposite to that of Europe. The facts are not surprising, since for the first time in many years the monetary cycle in the United States is opposite to that of Europe.

The Phantom of Deflation

It is also in the Old Continent where we can locate the fourth most important economic event of 2016: the deflation. We must remember that the weakness of the European recovery has had a downward impact on the price level since at least 2013 and that the European HICP has failed to register negative inter-annual scale values, but this year the deflationary threat has been Especially important.

The reason is none other than the expansionary monetary policies of Europe and its inability to recover prices. In other words, it is not particularly worrying in Europe does not increase inflation, but this does not happen despite all the efforts of the ECB for it. This aspect is essentially relevant, since it raises doubts about the effectiveness of the monetary instruments available to Mario Draghi.

However, the last months of the year have seen a slight rebound in prices accompanying the recovery of oil: only time will tell whether this is due to a postponed effect of the ECB’s policies or whether it has its origin in the inflationary pressures of Member States Energy market. What is particularly worrying is not that inflation does not rise in Europe, but this does not happen despite all the ECB’s efforts to achieve this.

Stock Rally

Finally, the volatility in the stock markets has also characterized 2016, seeing values have continued to climb while others have plunged to historic lows. Although the period 2014-2015 had alternated with other bassists bullish months, this year seems to have been a different pattern, with continued increases that are interrupted only by strong corrective movements that only last a few days.

The new market dynamics, on the other hand, has partially broken the convergent movement of many values. Thus, while some sectors (such as European banks) suffered sharp falls in its price , technology companies in the US and accumulate appreciation by 28% since March (by reference to the Nasdaq Composite ) and lead a genuine market rally.

Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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Filed Under: Economics Tagged With: World Economy in 2016

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