2016 Economic Forecast

2016 Economic Forecast

The October 2015 World Economic Outlook update from the International Monetary Fund (IMF) highlights the complex forces that currently weigh on global growth and will likely continue in the coming year.

Global growth is projected at 3.3 percent in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8 percent.

In emerging-market economies, the growth slowdown in recent years reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China and economic distress related to geopolitical factors. A rebound in activity in a number of distressed economies, including Russia and the Middle East, is expected to result in a pickup in growth in 2016.

The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies.

Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth.

United States

Underlying drivers for acceleration in consumption and investment in the United States – wage growth, labor market conditions, easy financial conditions, lower fuel prices and a strengthening housing market – remain intact, according to the IMF report.

Charles Plosser, former president of the Federal Reserve Bank of Philadelphia, concurred with this assessment during a recent economic forum at Arizona State University (ASU). He noted the economy is on a firm foundation with consumer finances in much better shape than they have been in a long time. Strong consumer spending has contributed to solid growth for the last two years, growing above 3 percent in all but two of the last eight quarters.

Plosser does expect, however, that real business investment will continue to remain soft in 2016 relative to historical experience due to overall and policy uncertainty.

“Monetary policy is arguably more accommodative today than it was at the height of the financial crisis or deepest point of the recession. Fortunately, the U.S. economy is no longer in crisis and it has come a long way from the depths of the recession,” he said. “It is time to get on with moving policy from crisis levels. The U.S. economy is well-positioned to withstand a modest increase in rates, which is consistent with the historical record of Fed policymaking and with the rules that have been found to provide good policy outcomes across a wide range of theoretical models.”

Arizona

Closer to home, a variety of indicators point to an improving Arizona economy.

“The gains we experienced in 2015 are setting the stage for continued advances in the year ahead,” said Lee McPheters, director of ASU’s JPMorgan Chase Economic Outlook Center. “Relative to the majority of other states in the nation, Arizona’s economy will appear quite solid. But compared to long-term historical growth during past decades, the gains will be somewhat below average.”

McPheters’ research indicates personal income in 2016 is projected to exceed 5.0 percent growth for the first time since 2011 as wages, employment and population all continue to increase. Arizona’s non-farm employment is expected to grow 2.6 percent and, the state will be on track to finally replace all jobs lost during the recession. The mix of employment in 2016 will be different, however, with knowledge jobs (professional and business services, health care and finance) accounting for nearly half of the new jobs, while manufacturing and government employment is expected to barely grow.