5 Financial threats to watch in 2016

2015 was a very rough year for the world economy, and it may not let up in 2016. The headwinds facing many national economies are getting stronger, rather than weakening, and that is having an impact on the world economy. In this article, we will look at five financial threats to watch out for in 2016.

Chaos in China

At the beginning of 2016, the Chinese economy was still relatively stable; however, now the possibility of chaos in China is looking less and less like a prediction and more like a current event.

Why does China matter so much in 2016? China has been the undisputed driver of much of the global growth in the last decade. Chinese demand for everything from oil to Japanese-made diapers was sustaining or increasing pricing margins across the world. With that demand weakening and China struggling to get its young financial system operating normally, there has been a gap that no other nation can fill. Even the U.S., which is still the preeminent economic power, doesn’t drive growth at a spectacular rate. The U.S. economy experiences 2-3% growth rate per year, whereas China has been experiencing double-digit growth.(For more, check out: Will China Slip Into a Recession?)

The U.S. Election

It is folly to read too much into the election before the two candidates have been chosen. The leadership race is usually a race to the right in the Republican party and the left in the Democratic party, followed by some heavy shifts towards to center by both final candidates once their party races are over. Even with this somewhat predictable pattern, there is a lot of uncertainty about any change in the leadership of the world’s strongest economy, and the markets dislike change. Adding to this uncertainty is the potential fate of the Trans-Pacific Partnership (TPP) and its hopes of spurring global trade. Some of the top candidates for president have gone on record against it, and it’s not clear if they will flip-flop on their position later on in the race.(For more, check out: How U.S. Election News Affects The Dow.)

Slowing Emerging Economies

Here again, the story has worsened rapidly as 2015 closed, and 2016 began. Brazil and Russia are slowing even faster than China, as the commodity slump has an outsized impact on their growth prospects. India, the other nation in the BRIC group, is doing fairly well with its focus on manufacturing and the fact that lower commodity prices help more than harm the world’s most populous democracy. Overall, however, emerging economies are feeling the beginnings of what could be a global retraction or even recession. (For more, see:Understanding Risk In the BRICs.)

The European Union

The European Union faces a myriad of geopolitical challenges in 2015. Especially since its member states are taking varying stances when it comes to accepting refugees into Europe. Long-term the imported workforce will likely work in the EU’s favor if the OECD, Brookings Institution, and the European Commissions’ European Economic Forecast are correct. That said, the refugee crisis has brought up discussions of closed borders and other measures that would impact the EU’s trade and economic advantages in a negative way.

Stimulus Failure

It is also important to note the increasing number of economies where stimulus-based economic policy is being shrugged off by the markets. Japan, China, and many other nations are attempting to stimulate their way out of a looming downturn. This group now includes the ECB acting on behalf of the eurozone nations, controlling the interest rates and bond purchases. The problem is that these actions seemingly have less effect the more they are deployed. The markets are continuing to weaken, and the central banks are quickly running out of tools that they can use to try and strengthen them. (For further reading, check out: Aging Japan Is an Arrow in the Back of Abenomics.)

The Bottom Line

There is no shortage of concerning global financial news in 2016. With China slowing along with most of the other BRIC nations, the U.S. facing election uncertainty, the EU dealing with the political fallout and stimulus spending having little effect, there will be a lot for traders and investors to watch unfold throughout the year. Of course, one investor’s chaos is another investor’s buying opportunity, so it might not be all bad news after all.

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