The United States
The Federal Reserve raised interest rates by 25bps during their December, 2016 meeting to between 0.50 – 0.75 percent, from 0.25 – 0.50 percent previously, being the most significant monetary policy announcement during 2016, the second-rate hike after ten years.
This decision was supported by:
- stable economic growth
- Strengthening labor market
- Rising inflation.
Economic growth in the US has been solid, with Q3’2016 annualized GDP coming in at 3.5 percent driven by an increase in personal consumption, following the 1.4 percent growth in Q2’2016 and 0.9 percent growth in Q1’2016.
Consumer spending has been the major driver of US growth this year, supported by a strong labor market that saw the unemployment rate fall to 4.6 percent in November from 5.0 percent in January, currently within the full-employment rate of 5.0 percent following an average monthly increase in jobs by 190,000 during the year.
The stock market performance improved on account of:
- An improvement in corporate earnings that rose 4.3% in Q3’2016 from Q3’2015
- The conclusion of US elections whereby the Republican candidate Donald J. Trump won, and he is expected to implement pro-growth policies during his term.
The S&P 500 has gained 11 percent since the start of the year. In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently near historical highs at 27.8x, far above the historical average of 16.7x, indicating an overvaluation of the market.
The Eurozone
The Eurozone has performed marginally well in 2016, with the pace of growth maintaining momentum over the course of the year, as economic growth in Q3’2016 came in at 1.6 percent, similar to growth in the first half of the year.
Manufacturing activity in the Eurozone remains strong, measured by the Purchasing Managers Index, which averaged at 53.2 in 2016 compared to 48.0 in 2015, indicating expansion of the manufacturing sector.
The region however suffered the biggest significant geo-political event during the year in the form of Brexit, whereby the United Kingdom (UK) voted to leave the Eurozone, and this is expected to:
- cause a decline in intra-regional trade,
- lead to uncertainty over jobs in the UK,
- result in a decline in consumer spending.
This is expected to adversely affect the United Kingdom and the Eurozone region as well.
The European Central Bank (ECB) met in December and maintained the base lending rate at 0.0 percent, and the rates on the marginal lending facility and deposit facility at 0.25 percent and -0.4 percent, respectively. In addition, the ECB announced an extension of their monetary policy easing program to December 2017 from March 2017, however, with a reduction in the amount of purchases to EUR 60 billion a month from earlier EUR 80 billion per month, amounting to an additional EUR 480 billion in asset purchases. The monetary easing has had a positive effect on the region’s economic growth.
The stock markets in the Eurozone have been on a downward trend, with EuroStoxx 600 declining by 4.9 percent, while the FTSE 100 lost 5.6 percent, owing to the anticipated slowdown in economic growth in the United Kingdom following Brexit.
China
The Chinese economy experienced a consistent growth rate of 6.7 percent during all 3 quarters of 2016, putting the economy on track to attain 6.5 – 7.0 percent economic growth target for 2016. This was supported by an increase in private consumption and a pickup in the industrial sector that posted the strongest growth in profits at 14.5 percent in Q3’2016, boosted by a recovery in commodity prices and increased investment in infrastructure.
According to IMF China is projected to contribute 1.2 percent towards the 3.1 percent global GDP growth in 2016, being the single largest individual contributor to global GDP growth, ahead of India and the US at 0.6 percent points and 0.5 percent points, respectively.
Economic performance in 2016 was supported by:
- increased government infrastructure spending,
- accommodative monetary policy,
- an increase in consumer spending.
The continued implementation of structural reforms should help China overcome risks that include weak global demand for exports, falling investment in the manufacturing sector and a slowdown in credit growth.