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The World In 2016

“The future ain’t what it used to be,” said Yogi Berra, and if the unpredicted uneventfulness of 2015 is anything to go by, predictions for 2016 are expected to be difficult. In conjunction with annual forecasting editions of the Economist magazine, we suggest the year coming will be able to be summed up in three words: woes, women and wins. Woes will sadly abound in the Arab world, as people keep flooding out of Syria and other ravaged places; Europe’s handling of the migrant crisis will remain woefully inadequate. On the economic front there will be little to cheer: the performance of emerging markets, including a slowing China, which will be disappointing, and will hold back global growth. Partly as a result corporate profits will also disappoint.

Women, meanwhile, will be at the heart of many of the biggest decisions of 2016. Investors will be watching for rate rises at Janet Yellen’s Federal Reserve. Hillary Clinton will be the candidate to beat in the race for the White House. Germany’s chancellor, Angela Merkel, will be at the forefront of the European Union’s response both to the migrant drama and to Britain’s demands in advance of its in-or-out referendum on EU membership. And Brazil’s president, Dilma Rousseff, faces a battle to resist impeachment.

Ms Rousseff will be hoping that some big wins provide a welcome distraction, as Rio stages the Summer Olympics. A carnival of sport awaits around the world. America has Super Bowl 50, France hosts the Euro 2016 football tournament and cricket-crazy India will win out in the T20 World Cup in March.

Other themes for 2016 will range from the ocean to space and from cybercrime to religion. In this respect, at least, the future is just as it used to be: ripe for a feast of forecasting.

 

Geopolitics: A liberal’s lament

obama

 

Look around the world as 2015 draws to a close, and it is hard for a liberal internationalist to find many reasons for optimism. Yes, digitally driven technological progress—from artificial intelligence to gene editing—is dazzling, and digital access is transforming the lives of ever more people in poor countries. But on three important counts the outward-looking globalisation of recent decades is in worryingly poor shape.

The first danger comes from China’s slowdown. By loosening monetary policy and launching yet another stimulus package or two, China will probably avoid a hard landing. But there is little sign of the debt clean-up, state-enterprise reform and overhaul of monopolies that are needed for a service- and consumer-led economy to thrive. China looks set for an ever more sluggish limbo: the old growth model dead, no new one to take its place.

A slowing China means global GDP growth will struggle to pick up pace and could even slacken further—remaining well below the speed necessary to quell deflationary pressure. That would rattle financial markets and stymie central bankers’ plans. America’s Federal Reserve may raise short-term interest rates by a quarter-point or so, but 2016 will see no serious monetary tightening. In the emerging world, despite floating currencies and fatter reserves, the year will expose vulnerabilities. There will surely be some debt crises (Venezuela? or even scandal-plagued Malaysia?). More corrosive will be the disappointment that sets in as it becomes clear that the rich world’s economies are losing oomph and that the era of rapid catch-up growth across poor countries is over.

The second concern for the liberal order is in the realm of great-power politics. America is turning inwards just as the global security system it underwrites faces its biggest challenges in a quarter century, from Vladimir Putin’s adventurism in Syria to China’s muscle-flexing in the South China Sea. Mr Putin’s cruise missiles will not win the war for Syria’s dictator, Bashar al-Assad. But they will prolong the conflict, swell the exodus of refugees to Europe and so exacerbate the biggest political crisis the European Union has faced. Across Europe, 2016 will be a year of bitter recriminations and gradual unravelling. Even if the Schengen system of passport-free travel officially remains in place, “temporary” border controls will spread, Europe’s frontiers will be blighted by the barbed-wired perimeters of “migrant processing” camps—and still hundreds of thousands of refugees will stream in.

The third risk comes from the rich world’s domestic politics. On both sides of the Atlantic, public trust in government has slumped and populist politicians are enjoying growing appeal. One strand of populism is the xenophobic right-wing sort (exemplified by Donald Trump in America or Marine Le Pen in France). Another is a soak-the-rich left-wing type (see Jeremy Corbyn, the hard-left new leader of Britain’s Labour Party or Bernie Sanders, the self-proclaimed democratic socialist who is challenging Hillary Clinton for the Democratic presidential nomination). These people are all tapping into a popular disillusionment with the pragmatic political centre. They have done far better than anyone would have expected even a year ago.

Some of these worries may prove ephemeral. In Britain Mr Corbyn’s party is in opposition and in a mess. America’s presidential primaries are often marked by a noisy populism which gives way to centrism when the general election comes. Some risks will counter each other. Europe’s migrant crisis will force a short-term rise in public spending that will boost demand and mitigate the economic hit from slower growth in China.

Still, it would be a grave mistake to be sanguine, not least because 2016 is a year of high-stakes votes, from America’s presidential election to (possibly) Britain’s in-or-out referendum on EU membership. More than is usual in a single year, decisions in 2016 could, as Barack Obama would say, bend the arc of history. That is why those who believe in an open, liberal world order need to act more boldly in its defence. Top of the list is Mr Obama himself. America’s president is still the single-most important individual defender of liberal internationalism. To uphold it, his remaining year in office needs to be marked by more active American engagement, particularly in the Syrian crisis and in the refugee exodus that it has spawned.

Liberal internationalists of the world, engage!

Mr Obama has an exceptional responsibility, but all politicians who value open internationalism need to fight for it. They need to expose the false logic underpinning xenophobia. The evidence, from America’s experience in the early 20th century to the Vietnamese boat people, is unequivocal. Provided they are quickly assimilated and integrated into the workforce, a tide of migrants is an economic boon—all the more so in ageing societies. Shamefully, Angela Merkel, Germany’s chancellor, is the only European leader brave enough to make this case. If the EU is to survive, others need to join her.

At the same time, the genuine problems of sluggish growth and stagnant wages demand bolder solutions, not populist quick fixes. Big ideas exist, whether large-scale investment in infrastructure or dramatic reforms of education and training. But too many politicians are trapped by a small-bore mentality: a tweak to an existing scheme here, a fiddle with a tax rate there. From the devolution of decision-making to the overhaul of schools, Britain’s Conservative government is the closest the rich world currently comes to a radical-centrist agenda, though it is marred by a misguided desire to cut tax credits for the working poor. Others need to emulate its ambition.

If market-friendly internationalism is to prosper, small-bore will not do. In 2016 it is time for radicalism at the centre.

 

Big Gets Giga

Big gets giga

 

“You can never think too big”. So proclaims the dusty sign outside a hangar in America’s Mojave desert where boffins are building the Stratolaunch, the world’s biggest aircraft, due for its maiden test flight in 2016. It could be a fitting slogan for a year in which the world’s biggest battery plant, the Gigafactory, will draw global attention and the biggest radio telescope (the size of 30 football pitches) will begin scanning outer space. The recent era has been one of megaprojects, fuelled by China’s growth and the commodities-driven drive for deeper oil wells and bigger mines. But now tech is going big.

Take the space race. The Stratolaunch, a brainchild of Paul Allen, a co-founder of Microsoft, will be a flying launch-pad aimed at shooting satellite-bearing rockets, and eventually astronauts, into orbit. If this big bird gets off the ground, the theory is, rockets could be launched from anywhere into orbit: cheaper than a blast-off from Earth, they could become the Ryanair of low-cost space travel.

In radio astronomy, too, the techies are thinking big—especially in efforts to find the faintest signals of alien life. The Five-hundred-metre Aperture Spherical Telescope, built in southwest China, will lend the world’s most powerful ear. It comes as scientists, such as Stephen Hawking, backed by Yuri Milner, a Russian technology tycoon, have embarked on the “Breakthrough Initiative” to search for extra-terrestrial intelligence.

Silicon Valley has grown rich on scalability. Elon Musk, founder of Tesla, an electric-car company, and of SpaceX, a rocket-maker, wants to wean humans off fossil fuels and take them to Mars; and, for him, size and speed are the essences. Construction of his Gigafactory, near Reno, Nevada, started in 2014. Tesla hopes it will produce its first batteries in 2016—and that economies of scale will cut their cost by a third.

The next big things

Of course, giant infrastructure projects will still be undertaken. China is building the world’s longest bridge, underwater tunnel and gas pipeline. Another fast-growing country—albeit a tiny one—will take the spotlight in 2016 when Panama unveils its expanded canal. And after 20 years of digging, the Gotthard Base Tunnel, the world’s longest train tunnel, will open in Switzerland.

Yet the high-water mark of Chinese growth may have been reached, austerity limits government budgets and the commodities “supercycle” is over. Now the tech cycle is in full swing with it the era of megaprojects is morphing into one of gigaprojects.

 

The World economy: A tale of two economies

The world of 2 economies

 

Emerging markets have given the global economy most of its muscle since the recession ended in 2009. But in 2016 rich countries will account for their largest share of global growth in this decade. Many emerging markets, including China, will be content to avoid a crisis.

The famous BRICs are in a sorry state. Brazil’s government has been both incompetent and corrupt. Russia’s has been no better, with a dose of military malevolence thrown in. Both economies will at best stagnate in 2016—which would be an improvement after both plunged in 2015. Such are the diminished expectations from these former stars.

China will perform reasonably well in 2016—if you believe the government’s numbers. By that reckoning, GDP will rise by around 6.5%. The reality almost certainly will be lower. China is mired in debt and has managed its currency and stockmarkets badly, sending shocks through the global economy. The odds of a genuine crisis in China in 2016, triggered by some combination of soaring loan defaults, bust banks and collapsing investment, are at least one in three, the highest in a generation. And a crisis in China would mean a crisis for the world.

India looks perkier: it will grow by more than 7%. But that is worse than its average of 8.5% growth between 2005 and 2010. India will crow that it has pushed past China in the growth league, but it has far to go: when China’s economy was India’s size ten years ago, it was growing by nearly 13%.

 

emerging markets

 

This improving outlook for the rich economies could evaporate if the emerging markets succumb to another financial crisis. They are prone to panic when America’s Federal Reserve raises interest rates; the mere hint of a Fed rate rise in 2015, and the stronger dollar it spawned, sent emerging-market currencies plunging. Although American rates will move higher in 2016, the rises will be small and infrequent, to cushion the risk of shocks.

 

Fed up

Even that approach carries dangers—for example, an even fizzier dollar pulling even more investment capital out of emerging markets. Fragile developing economies (keep an eye on Venezuela) could be pushed to the brink. Nothing quite like the emerging-markets crisis of 1997-98 seems likely, since most countries have built up their foreign-exchange reserves and allowed their once-brittle currencies to float. But countries like Turkey and South Africa are still at risk, and companies that borrowed heavily in foreign currencies in the past decade could find their finances strained if local sales sag and their currencies depreciate.

Commodity producers, at least, will have reason to be a little less gloomy. The prices of energy, metals and farm products, which fell by 30-50% between 2011 and 2015, will rise in 2016; the price of oil will climb by around 10% from a year earlier. But that will still leave crude oil at barely half what it was just a few years ago, giving consumers cause for cheer.

The world economy hasn’t managed growth of more than 4% since 2010. Save for America, 2016 will be another year of repair, recovery, reform and risk for most countries. The prospect of a synchronised upturn that reinforces growth globally, built on steady consumer demand, business confidence and political stability, will remain out of reach for another year.

 

Year of the unicorn

Unicorn

 

Unicorns were once figments of fantasy. In 2016 they will be everywhere. Aileen Lee, a venture capitalist, coined the term “unicorn” to describe a private technology company valued at over $1 billion, an occurrence that used to be as unusual as spotting a mythical creature. No longer. In mid-October there were 141 unicorns worth a combined $504 billion globally, up from eight unicorns worth $21 billion in 2010.

Tech unicorns include headline-grabbing firms such as Uber (a taxi-hailing company valued at $51 billion), room-renting Airbnb ($25.5 billion) and Snapchat, a messaging firm ($16 billion). Investors have poured money into tech, sometimes indiscriminately, hoping to profit from the next big thing. FOMO (fear of missing out) is a sentiment so common in Silicon Valley that it has its own acronym.

All eyes should be on unicorns in 2016. With so many investors chasing growth in an environment of low interest rates, capital for startups has been easy to come by. “It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians,” said Stewart Butterfield, the boss of Slack, a $2.8 billion software unicorn, in 2015.

Such munificence will be harder to count on. Many unicorns have been given leeway by investors, who have emphasised growth and market share over profitability. In 2016 investors will grow impatient with unicorns that do not map out how they are going to start making profits. Some firms with high “burn rates”, which are churning through cash, will try to raise another round of financing and will be met with refusal. “On-demand” companies, which use smartphone apps to connect consumers with services like groceries, food delivery, shipping and home-cleaning, will have an especially tough time, because they are burning through lots of cash and face plenty of competition. So will many unicorns in China, where the economy is slowing.

Plenty of unicorn-“haters” predict that this elite group of startups will soon face a mass extinction, much like the gruesome fate that befell many firms when the last tech bubble burst in 2001. Those expecting a dramatic wipe-out, however, are going to be wrong. The addressable market for firms is much larger than it was during the dotcom bubble of 1999-2000, thanks to mobile smartphones; many of today’s unicorns have viable businesses that could be profitable if they stopped spending to gain market share. And many entrepreneurs have been quietly building up cash reserves, in case the market turns against them. Airbnb has an estimated $2 billion stored up.

Although those unicorns with lots of cash have no urgent need to go public, some will file for initial public offerings in 2016, giving a much larger group of investors the chance to assess their under­lying strength. Airbnb and Dropbox, a cloud-storage firm, are two that may list their shares in the year ahead and are worth watching. And firms that do not go public in 2016 will face pressure to do so in 2017, because private investors will want to see some serious cash returns.

Beware a techquake

Seeing more startups fail in 2016 will be no bad thing and is a natural occurrence in the tech industry. Any cull will helpfully reduce competition for strong startups and public companies, which have been battling private firms that are not held to the same rigorous financial standards as public ones. The unicorns have distorted the job market; public companies find it more difficult to hold on to top employees, lured elsewhere by the promise of equity and other venture-capital-funded perks.

While many are waiting to see tremors in the tech industry, they would be wise to consider the possibility of an actual quake too. San Francisco and Silicon Valley, where most of America’s unicorns have their headquarters, sit on a fault line. The area’s last large earthquake was in 1989 and—who knows—another one could come in 2016. Although the tech startups tend to be relatively light on physical infrastructure, running many of their operations in the cloud, a big earthquake could still disrupt their businesses. The timing of natural disasters and their impact are never predictable, but just as unicorns can turn out to be real, so can the big surprises known as “black swans”.


The $10 billion club

Th 10 Billion Club

 

Banks around the world will finally be put out to pasture in 2016 and replaced by “fintech”, as financial-technology startups dub themselves. That, at least, is the consensus in Silicon Valley, whose t-shirt-wearing denizens think of banks as the Kodaks of the 21st century: incumbents whose time is up. Twenty-somethings developing apps, often turbocharged by plentiful helpings of venture capital, are baffled as to how plodding banks even managed to muddle through to 2015. Finance, all bits and bytes, is there for the taking. Even the titans of Wall Street seem rattled. “Silicon Valley is coming,” warned Jamie Dimon, JPMorgan Chase’s boss, in a letter to shareholders in 2015.

The insurgents’ claims are exaggerated. But there is no doubt that “disruption” has at last reached finance, an industry so regulated and politically connected that it once seemed above the threat of new entrants. Some of the early stars of fintech in San Francisco, London, Stockholm or Shanghai are doing business at levels once considered the preserve of century-old firms. Around 50 are valued at over $1 billion, giving them the mythical status of “unicorn”.

But even $1 billion will start to feel old-hat in 2016. The biggest fintech outfits, in fields from lending to payments and asset management, will celebrate doing business in the tens of billions of dollars—at least if their exponential growth rates hold. A safe prediction for 2016 will be that someone will come up with a waggish moniker for such firms.

An early joiner of the $10 billion league will be Lending Club, a “marketplace lending” platform which pairs people wanting to borrow money with those who have some to spare. It is to banks what Airbnb is to hotels: an elusive rival, given that it acts as a matchmaking platform rather than a provider of services. Banks could easily dismiss the San Francisco firm in 2012, when it was arranging a mere $60m of loans a month, mostly recycling money from retail savers. Now large institutions such as hedge funds provide much of the capital loaned out. Lending Club should finish 2016 doing well over $1 billion of credit a month.

Automated wealth advisers, which aim to replace human investment advice (for example on how to squirrel away for retirement), might also cross the $10 billion mark—in this case in terms of the assets they manage on behalf of clients. Wealthfront, based in Palo Alto, and Betterment, based in New York, will both start the year managing over $3 billion each. They were once able to double assets every six months but their growth has tapered as incumbents such as Charles Schwab and Vanguard have launched competing products. A return to old ways could see them reach $10 billion each towards the end of the year. If not, they will serve as a salutary lesson into how the fortunes of fintech darlings can turn.

Venmo, a service used mainly by American teens to whizz money to each other, will be another $10 billion club member. A unit of PayPal, it has irked banks by offering free, convenient transfers of trivial sums of money, sometimes just a few cents, making banks’ own apps look clunky. It faces new competition from Facebook and Apple, both of which launched payment facilities in the last year or so.

Other bits of fintech will amble to dizzying heights; 2016 will be the first full year in America where companies will be able to “equity crowdfund”, giving (small) shareholdings to backers wanting to invest perhaps just a few dollars. The money-transfer business is gradually being wrested from banks and specialists like Western Union, which offered uncompetitive exchange rates: nimble online operations like TransferWise are growing fast. More and more money will be spent deploying “blockchains”, the innovative technology that underpins bitcoin. A wave of new entrants want to offer day-to-day banking through current accounts, a service where old-school banks have thus far not faced competition. Amassing retail deposits would be a fast way into the $10 billion club.

 

Just a rounding error?

Silicon Valley’s exuberant claims about banks’ demise should be taken with a pinch of salt. Even $10 billion is a rounding error in the grand scheme of global finance: roughly 0.4% of the total assets of JPMorgan, say. Robo-advisers manage chicken feed compared with a UBS or BlackRock. Fintech’s main effect up to 2015 has been to force banks to sharpen their game. However, if their hockey-stick growth continues in the coming year, and their prospects remain as bright, fintech champions will go from being finance’s gadflies to something altogether more substantial.

 

Just business

Just Business

 

Discussions on the state of the American economy in the election year ahead will be dominated by ­concerns over income inequality and the fate of the average worker. In September 2016 JUST Capital, a non-profit organisation, will launch an index that seeks to tackle these issues by, for the first time, openly tracking and ranking the performance of America’s largest 1,000 companies against the issues deemed to be most important by the public.

This idea of a “people’s index” driving more just and balanced corporate behaviour supposes that the greatest pay-off for addressing societal stresses will come from shifting corporate behaviour, not government policy. If firms are forced by the marketplace to be more in synch with the American public’s view of “justness”, the competition for “goodness” could have a huge impact.

 

worst among unequals

 

Corporate after-tax profits are at their highest since 1929, yet labour’s share of income is hitting 65-year lows. For most Americans, real income levels have flatlined for a generation. In 1980 the average CEO made roughly 42 times more than the average employee. Today, that ratio is 373 to 1. Such a gulf is worrying in part because of the apparent correlation between a country’s level of income inequality and a host of social, health and civic problems.

Adding to the distress is the fact that employees are seeing cuts in programmes related to health, retirement and other benefits, as companies strive to lower costs. The share of profits invested back into businesses, rather than being distributed to shareholders, is also dwindling. In 2014 S&P 500 companies bought back $553 billion of their own shares, twice the amount the same companies spent on R&D over the same period.

It’s easy to see why many in 2016 will be tempted to declare the American Dream over. But that may be premature. New research conducted by JUST shows that, despite the above, and despite trust in business being close to an all-time low, most Americans agree that what is good for business is good for the country. Moreover, they believe companies can play a positive role in building a more just society, and are willing to give credit to those that try to do so.

While this is heartening, the punch line is that when the public was asked about the specific factors that constitute “just” business behaviour in America today, the number-one defining issue was the fairness of employee compensation and benefits. Americans, it turns out, assign the greatest value to the very thing that a variety of factors have significantly undermined over the years.

History teaches us that during periods of rapid technological change—as in the Industrial Revolution—the lives of workers and capitalists are turned upside down. We shouldn’t be surprised that the exponential technological advances of today have similarly dramatic impacts, both positive and negative. But we can seek to make sure the benefits are spread more evenly.

At the heart of the matter is the concept of a rebalancing of corporate interests. JUST’s work indicates that, regardless of political ideology or income bracket, the public believes companies are too focused on meeting the needs of shareholders, and have greater obligations to employees, customers, communities and the environment than the firms themselves acknowledge. Strong majorities of both non-investors and investors polled also believe companies should do a better job of balancing the interests of multiple stakeholders.

 

An unsettling year for the markets

An unsettling year for the markets

 

Investors face every new year with uncertainty. But the outlook for 2016 is especially hard to fathom because of two key questions: will the slowdown in the Chinese and other emerging economies continue? And how far will the Federal Reserve (and perhaps the Bank of England) move to tighten monetary policy?

The pattern in recent years has been for investors to start the year in optimistic mode about the outlook for economic growth and corporate profits, only to temper their enthusiasm over the summer. But this time is different. Moody’s, a ratings agency, has reduced its GDP-growth estimate for G20 economies in 2016 from 3.1% to 2.8%. Global trade has been disappointing: volumes fell in the first half of 2015 for the first time since 2009.

 

Where next

 

Since the financial crisis, investors have seen weak economic data as providing a good excuse for central banks to ease policy. That might be a bit much to expect from the Fed in 2016, but investors will be happy if any interest-rate increases are few and far between. The European Central Bank and the Bank of Japan still seem committed to monetary expansion. But the big hope is that China will respond to its slowdown with some policy stimulus, a move that would give a big fillip to other emerging markets, particularly commodity producers.

Equity markets in the developed world have benefited from low interest rates (which have steered investors out of cash and into risky assets) and from healthy profit margins, thanks to subdued wage pressure. But with American unemployment having fallen significantly, real wages are rising because of subdued inflation. And slowing emerging markets mean that companies cannot count on a bounce in global demand to keep profits motoring.

 

The waiting game

Bond investors must feel as though they are in a state of suspended animation. Every year, most commentators predict that the era of low yields is bound to end, because of a pick-up in growth and inflation, or a change in monetary policy. But the big sell-off has never really occurred; in 2015 quite a few European government-bond markets even had negative yields for a while. The default rate on corporate bonds remains low by historical standards and companies have managed to lock in low rates, easing the strain on their finances. Until inflation surges again, it is hard to see why bonds should sell off, and falling commodity prices and weak growth mean global inflation is likely to stay subdued. (Poorly run countries like Russia and Venezuela are exceptions.)

For commodities, the news has been so bad that the mood must change at some point. Investors have become convinced that the “supercycle” is in the down phase; abundant supply is overwhelming stagnant demand. Oil is the obvious example: Saudi Arabia’s attempt to put American frackers out of business in 2015 didn’t seem to work, and in 2016 production from post-sanctions Iran will be hitting the market. However, a lot of bad news may now be priced in.

Economic and profit fundamentals are not, of course, the only factors that could affect investment decisions in 2016; politics may come into play. The Greek crisis rattled markets for months in 2015. The big political event of 2016 will be the American presidential election. Investors will be sanguine about the outcome of a Bush-Clinton contest but will get nervous if the alternatives are Bernie Sanders and Donald Trump. British investors will get twitchy in anticipation of the country’s referendum on EU membership

The final cause of uncertainty may be market liquidity. For regulatory reasons, banks are no longer playing as big a role in market-making as they used to. The sell-off in August 2015 indicated that prices can crater for a while, with investors unwilling to hunt for bargains. The occasional “flash crash” is one thing; if they happen every month, investors might start to find zero returns on cash more attractive than before.

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