Europe will matter more than China in 2016....

There is a much larger crisis than whether or not Greece's debt can be re-negotiated again, or whether the UK leaves the European Union....

2016 has not started well from an economic perspective. George Osborne warned the country that the “headwinds” from China could blow the UK economic recovery off course and successive poor data from China has underscored the severity of that risk. Despite a slight rally at the end of the month, oil prices have fallen and equity markets have looked shaky too, not least because of concerns around the sustainability of corporate debt as commodity prices fall. To cap it all, the IMF’s World Economic Outlook included a major downgrade of its forecast for global growth this year.

Maybe markets need a post-January detox rather than a post-Christmas one!

Will the rest of 2016 carry on like this?  From a trade perspective it is hard to see a substantial increase in oil prices. The movement of global trade and oil prices is highly correlated and Equant Analytics is forecasting that trade will grow by just 1.5% this year. Even the World Trade Organisation is not that much more ambitious in its forecasts for trade (2.8%) so it’s hard to see much of an increase in the oil price.

If that really is the case, then we can expect markets to be at best volatile. For a couple of years now there has been an underlying nervousness in markets about the effects of sovereign debt on global growth and while oil prices remain low and the US dollar high, this tension will remain. The consequence is the potential for markets to flash-crash at any moment.

Some have argued that we may even see a return to recession and even a global systemic crash. Credit Suisse economists predicted that a Brexit would create an economic shock for the UK and the general mood music in markets as we enter February is pretty grim.

But what is really likely to haunt markets for the foreseeable future has nothing to do with economics, China or oil.  It is the issue of whether or not Europe will hold together as it faces the biggest challenge to its raison d’être in its history:  the migration crisis. What started as a political crisis in Syria has become geo-political. Nations have reacted in what they perceive as their national interests to close borders or create greater border controls across Europe. In November I wrote about a high-level conference where European ministerial delegates were saying under Chatham House rules that Schengen was dead. After Paris and Cologne they are now saying that publicly.

This is for Europe a much larger crisis than whether or not Greece’s debt can be re-negotiated again, or whether the UK leaves the European Union. If Europe falls apart this year then who can say what will happen in markets and politics? More than this, who can say what will happen to the humanitarian efforts to help people in genuine need?

The world needs Europe to hold together for economic, political and security reasons and that includes the UK staying in Europe. We are more perilously close to its break up than at any point since the Treaty of Rome.   2016 will be defined by what happens here, not what happens in China.

Liveryman Dr. Rebecca Harding

CEO, Equant Analytics

Dr. Rebecca Harding is the co-founder and CEO of Equant-Analytics. She is a serial technology entrepreneur and has also held senior roles in business, academic institutions internationally. These include founder and CEO of Delta Economics,  Senior Fellow at London Business School, CEO of the Global Entrepreneurship Monitor worldwide, Head of Corporate Research at Deloitte and Chief Economist at the Work Foundation. In her early career she was a Senior Lecturer at the Science Policy Research Unit, Sussex University and a Reader in Economics at the University of Brighton. She was a Specialist Adviser to the Treasury Select Committee and Chief Economic Advisor to the All Party Parliamentary Group on Entrepreneurship. She has published 8 books and over 200 articles and reports. Rebecca is a Director of the German British Forum, a Fellow of the Royal Academy of Arts, an Academician for the Academy of Learned Societies for the Social Sciences and a member of the Society of Business Economists. 

Tel:    +44 (0)7803 710711

Email:  rh@equant-analytics.com

Twitter:  @RebeccaAHarding

Skype:     rh.equantanalytics