"For economic forecasters, the beginning of each year is an exercise in humility. Comparing previous forecasts with actual results can be a source of frustration. This was certainly the case concerning oil prices in 2015. Early last year, Brent crude oil was trading at USD67 a barrel, and the consensus forecast (the median value of all individual forecasts) called for Brent to rise to USD74 by Q4 2015. Yet we ended the year at around USD37. For users of these predictions, this enormous spread underscores the importance of understanding the forecasters’ level of confidence. The dispersion of individual forecasts can be particularly instructive. The most optimistic scenario called for Brent to finish the year at USD104, while the most pessimistic scenario was USD48, respectively an increase of 55% or a decrease of 29% relative to prices at the start of 2015. Such a gaping spread begs for average forecasts to be considered cautiously. Today, the consensus calls for Brent of USD60 in Q4 2016, with individual forecasts ranging from USD43 to USD95. Clearly, it is worth being cautious again this year, even though everyone expects oil prices to rise.
As to the main macroeconomic variables, the forecast dispersion is not as wide (which is typical except during recessions). Even so, forecasters’ confidence in their GDP growth estimates can vary widely from one country to the next. In 2016, we are looking for growth of 2% in the United States and 1.5% in the eurozone. Excepting an unexpected event, the end results should be rather close to our forecast (we will see at this time next year…). The United States is verging on full employment, wage growth is expected accelerate, interest rates are still low and the Federal Reserve will pursue a cautious policy, marked by a very gradual tightening trend. Among key factors to watch is the winding down of the manufacturing sector and the pressure on corporate earnings, which could be squeezed by investment. In the eurozone, the “planetary alignment” should continue to operate: low oil prices, a weak euro (at least relative to 2014), low interest rates and an aggressive monetary policy, which should boost lending momentum and fuel a slightly expansionist fiscal policy.
In the emerging countries, in contrast, there is still a very high degree of uncertainty. The sharp sell-off on the Shanghai stock exchange on the first day of the year illustrates how sensitive investors can be when economic statistics fall short of expectations. It is not China’s economic slowdown as much as the lack of visibility that is eroding confidence, which explains why western equity markets have been so reactive. Obviously, the Chinese factor is extremely important for the emerging countries, especially for those that are commodity exporters. It is worth keeping in mind that these countries suffered a triple shock in 2015 with falling commodity prices, shrinking volumes and weaker currencies (or swelling debt in foreign currencies). In H2 2016, the cyclical environment will be very closely linked to developments in China. We expect growth rates in these countries to level off towards the middle of the year, with full-year growth estimated at 6.5%. Such a scenario would give the emerging markets and the commodity markets some relief. If this is not the case, the tensions and jitters observed in 2015 are bound to persist. Eventually, this situation would end up taking a toll on growth in the developed countries as well. As the year begins, all eyes are currently riveted on the Chinese economy. It is a safe bet to assume this will continue to be the case throughout the year."
William De Vijlder, Group Chief Economist, BNP Paribas
