Home 2016 in Review – The Economic Events that Shook the World

2016 in Review – The Economic Events that Shook the World

Posted by on December 29th, 2016.

Goodbye 2016

2016 has, for many, become a year infamous for unexpected events, twists and turns. A year where social and political shifts reverberated across the world.

While it is unclear if, years from now, people will look back on 2016 as the year where everything changed, there’s no doubt that it’s been a year that few of those who lived through it will forget.

So what were the year’s biggest economic events and challenges? How has the state of the Euro project changed? How much did Donald Trump’s election as US President change the landscape of global trade? And did the Cubs winning the World Series affect the US Dollar? (It didn’t really, no).

Before we look ahead to 2017, let’s take a look back at what made 2016 such a juggernaut of economic events…

Change of Plans for Britain: The UK Votes Brexit

Regardless of how the rest of the world feels, 2016 probably was the year everything changed for the UK. In the EU Referendum towards the end of June, the United Kingdom – or at least, England and Wales – voted to ‘Leave’ the European Union, with just over half of the voting public as its mandate.

This Brexit vote came as a huge shock to pollsters (most of whom had strongly predicted a Remain vote) almost half of the country’s public, and markets around the globe that benefit from Britain’s membership in the European Union and its trade area.

Britain’s choice to withdraw from the EU was unprecedented on many levels. Britain had been a member of the Union since its inception in 1993 and had been a member of its predecessor the European Economic Community (EEC) since 1973 – and no other country has ever left the EU until now (though Greenland had left the European Communities after separating from Denmark).

As a result, no one knew what an EU withdrawal looked like or any kind of common process for the procedure. Authors of the Lisbon Treaty (the EU’s current ruleset) have stated that they didn’t envision “Article 50” (the formal leaving process) would ever need to be activated.

The vote had at least one immediate and tangible effect on the global economy – the value of Pound Sterling (GBP) against many major currencies plummeted and has not recovered to its pre-July levels since. The Pound quickly became the worst-performing major currency of 2016.

Brexit Pound

Investors throughout the foreign exchange market deemed that Britain’s economic outlook without access to the EU’s single market or the free movement of EU labour was significantly dimmer than it had otherwise been.

However, despite some forecasts that the vote could cause a UK recession before the country had even begun the Brexit process, the economy has so far performed solidly and consumer confidence has remained sturdy.

But the Brexit vote does appear to have had a genuine long-term effect on the very nature of Sterling trade. The Pound is now increasingly a politically (or Brexit) correlated currency that reacts primarily to the outlook of Britain’s future in global trade rather than moving in response to traditional motivations, like data releases.

For example, November and December saw the Pound put on its best performance in months due to increasing hopes that the UK government would find a way to retain EU single market access.

Sterling’s value being directly impacted by the Brexit vote is expected to have long-term ramifications, including a forecast inflation spike in 2017.

The market shock of the Brexit vote also briefly affected currency and stock trade around the world as traders rushed to safe havens and poured out of UK or Pound-valued assets, causing some to dangerously plummet. This also led to another of 2016’s major economic events…

Bank of England (BoE) Cuts Interest Rates – How Low can They Go?

Ultra-low interest rates became increasingly common in major economies following the 2007/08 global market crash as governments and central banks attempted to counter the economic chaos.

In 2009 Britain’s own central bank, the Bank of England (BoE) cut the UK’s interest rate down to 0.50% (a record-low at the time). This is where the interest rate remained until 2016 as the economy slowly recovered from recession and stagnation.

The Brexit vote in June 2016 however, marked a distinct change in direction.

No longer was Britain on a slow but sure recovery course, the nation was now threatened by widespread uncertainty. As a result, the Bank of England moved to take action for the first time in seven years and cut the country’s interest rate to a new record-low of 0.25%.

That wasn’t all; the BoE also introduced a historical stimulus package in an effort to help boost economic activity and keep the country treading water throughout the Brexit process.

This included a £100b scheme to help high street banks introduce new rates to consumers and businesses and Quantitative Easing (QE) programs with intent to buy £60b of UK government bonds and £10b of corporate bonds.

The bank credits this aggressive easing package with playing a significant part in Britain’s strong economic activity in the second half of the year.

Economic performance has been so solid that some analysts have even suggested the Bank of England may pull back slightly in the coming years if the trend continues. However, fears of losing jobs and businesses as the UK pulls out of the EU and loses access to skilled migrants and smooth trading conditions over the coming years means the BoE may have its work cut out.

UK Government Reshuffle

The Brexit vote was also the single biggest reason behind the UK government’s 2016 shakeups.

Despite winning the 2015 general election, ex-Prime Minister Conservative David Cameron stepped down from the role after the Brexit vote and was succeeded by ex-Home Secretary Theresa May.

While a snap election was not held and the Conservatives remained in power, May’s government has considerably different priorities, reflecting the nation’s new trajectory since the Brexit vote.

May and Hollande

May’s government introduced new cabinet roles, such as the ‘Secretary of State for Exiting the EU’ (or ‘Brexit Secretary’), ‘Secretary of State for International Trade’ and ‘Business and Energy Secretary’ which indicated that the government was taking the Brexit seriously.

Many members of Cameron’s cabinet were also replaced. Brexit Leave campaign head and previously Prime Minister-hopeful Boris Johnson was given the key role of Foreign Secretary.

More recently, the country’s new Chancellor of the Exchequer, Philip Hammond, (replacing George Osborne) indicated in his first Autumn budget Statement on the job that rather than focus on austerity and the nation’s deficit, it would instead increase government spending on infrastructure and innovation in order to keep the nation’s economy afloat throughout the Brexit process. Theresa May’s most well-known catchphrase has become ‘Brexit means Brexit’.

The Brexit vote also acted as a catalyst for tensions to flare up in the UK’s Labour Party, causing it to fracture and fall into a leadership contest. Tension in the party remained even after leader Jeremy Corbyn kept his position with a strong majority of the vote – meaning the UK’s next general election in 2020 (which may be after the Brexit has completed) could be a controversial one.

Not only has the Brexit vote perhaps permanently changed the UK’s economic and political landscapes, it’s also has a massive impact around the globe in ways besides the impact of Pound weakness on foreign exchange and trade.

The Brexit vote has been seen by some analysts as ushering in a wave of nationalist, populist politics in the developed world. Some critics have also blamed the Brexit vote for increasing the popularity of ‘post-truth’ political movements driven by emotional motivations.

Some even speculate the Brexit vote catalysed, in part, Donald Trump’s historic 2016 US election win…

Trumping Globalism: Businessman Trump’s Shocking US Election Win

The majority of 2016 was fairly calm for the United States of America. The nation’s economy continued edging away from the lows and slows of the 2008 financial crisis and hope was high after December 2015 saw the Federal Reserve hike US interest rates from their record lows – with the promise of more hikes on the way throughout the year.

However, what became increasingly clear as the months drew on was that nothing was clear. Economic recovery was mixed and the year was decorated with what many consider to be the ugliest and most divisive Presidential campaign in recent memory.

Similarly to the Brexit campaign in England, the US 2016 Presidential race was a marathon of mud-slinging and defamation.

Initially considered to be a humorous outsider, the widely known businessman and reality-TV star Donald Trump eventually became the Republican nominee due to his charisma and fiery rhetoric on the campaign trail. This was followed by months of fierce campaign battles between him and his Democrat rival Hillary Clinton.

Most analysts and pollsters in the US expected a tidy win for Clinton and a smooth transition and continuation from President Obama’s status-quo.

However, in a situation not unlike the Brexit vote, pollsters, analysts, world leaders and citizens around the world were shocked when, in early November, Donald Trump was elected the next US President by clinching victory in enough states to win the Electoral College vote.

Already a controversial candidate due to his unorthodox language and hard protectionist stances on immigration and trade, Trump’s win via Electoral College was also controversial as he actually lost the popular vote to Clinton – revealing a heavily split US, similar to the ideological split seen in the Brexit vote.

Trump and Clinton

As many economists and analysts predicted, global markets were also sent into shock by Trump’s win. However, the shock did not play out as many expected.

Trump’s Nation of Reflation

One of the first things Trump’s transition team highlighted following his election was his commitment to high government spending on economic infrastructure, with the aim of giving a boost to economic activity and inflation within Trump’s first year of administration.

One of the areas Trump intends to spend the most is on bringing mining and manufacturing jobs back to the US.

This, as well as a ‘Presidential’ tone in his acceptance speech seen as uncharacteristic, sent many facets of US markets rallying, including US stocks. The US Dollar also strengthened, largely due to higher inflation hopes bolstering bets of more regular interest rate hikes from the Federal Reserve.

These two factors aligned quite well – the Fed was already on its way to hiking US interest rates in December and Trump’s promise of reflation-inducing policies during his term distracted markets from the anti-globalisation, protectionist stance seen previously on the campaign trail.

As the world’s biggest economy, the Trump-shock to US markets unsurprisingly had far-reaching effects throughout November.

Investors poured out of risk-correlated currencies and avoided investing in assets tied to nations that rely on US trade amid remaining fears that Trump may damage trade links.

Trump also pledged to sever the TPP trade deal in his first month of office, which was seen to some Asia-Pacific nations as a blow to their US trading relationships. Even before taking office, Trump’s stances on trade, jobs and climate change have caused political and economic tensions to rise between the US and other major economies like the Eurozone and China.

Made in USA

However, the effects haven’t all been bad either. The increase in demand for the US Dollar and higher odds for Federal Reserve interest rate hikes has seen the US Dollar surge against overvalued rivals like the Japanese Yen (JPY) and Australian Dollar (AUD), removing some pressure from Japan and Australia’s economies.

Federal Reserve Perceives a Hawkish 2017

After months of ‘will they? Won’t they?’, the Federal Reserve finally hiked US interest rates in December 2016 by 25 basis points – from 0.50% to 0.75%.

The bank had indicated after December 2015’s rate hike that it would adopt a highly hawkish rate outlook for 2016 and would hike rates as much as four times throughout the year. However, as 2016 came to an end only one adjustment to borrowing costs had actually been made.

The shock and uncertainty of a potential Trump win was seen as a significant downside factor for higher interest rates throughout the year, but by the end of the year it was clear that, in the US at least, Trump’s win had given markets high expectations for domestic inflation.

Analysts predicted that the Fed would take a modestly optimistic tone on 2017 and hint at one or two rate hikes taking place throughout the year.

However, the Fed instead hinted at as many as three. While after 2016, this outlook is anything but certain, it indicated that the Fed was willing to fully cooperate with the reflation policies of the incoming Trump Presidency.

That is – IF the Presidency leads to as strong inflation as Trump’s team hopes. The Fed was careful to warn in its final meeting of the year that the US labour market was near full capacity, meaning Trump’s intention to stimulate inflation by investing trillions of Dollars into jobs and infrastructure may not provide as much of a boost as hoped.

Despite a hawkish outlook for the US economy from both the incoming government and the Fed, one word will be as central as ever to the Fed and US markets during Trump’s first year at the helm – uncertainty.

Eurozone Economic Struggles Continue: The ECB Steps up Easing Measures

For the European Union, the Brexit vote and the Trump Presidency have simply been two new additions to 2016’s pile of problems.

The Eurozone in particular continues to see economic struggles. With many members of the Euro currency bloc still attempting to recover from the 2008 global market crash and others suffering from Greece’s recent financial crises, the European Central Bank (ECB) took aggressive action near the beginning of the year in an attempt to boost economic recovery.

ECB President Mario Draghi is now famous for ringing in the ending of the Eurozone financial crisis with the words “whatever it takes” – a phrase he still uses regularly in attempt to instil confidence.

In March 2016 he made good on his word once more by announcing that Eurozone monetary policy would be eased even further. The interest rate would be cut by 5 basis points, taking it to record lows. Deposit facility interest rates were decreased by 10 basis points.

The ECB’s asset purchase programme was considerably expanded to €80 billion, beginning in April, amongst other quantitative easing (QE) measures such as investment bonds denominated in Euros and four four-year refinancing operations to encourage borrowing.

While the original end-date for this stimulus package was originally set for March 2017 ‘and beyond if necessary’, the slow economic recovery in the Eurozone left speculation alight all year that this would inevitably be extended.

Eurozone inflation eventually ticked up slightly towards the end of the year but this was not enough to restore ECB hawkishness. Bank officials had made calls throughout the year for Eurozone state governments to assist monetary stimulus with fiscal policy – calls that went largely ignored.

During December’s European Central Bank policy meeting, the bank did indeed extend the stimulus programme past its March 2017 end-date: to December 2017. This indicated that the Eurozone’s current trajectory of economic recovery was not satisfactory enough for the bank to end the QE package in March.

However, things have ultimately started looking slightly better. The aforementioned steady increase in Eurozone inflation was one of the reasons the ECB decided in December that the €80bn QE program would be softened slightly to €60bn from April to December 2017.

Tension in the Union: Political Fears in the EU

As well as sluggish inflation, the Eurozone has experienced a slew of political tensions over the last 12 months. For one thing, Greek debt relief talks are still ongoing as the nation struggles with austerity in order to boost its GDP.

Then along came the Brexit vote. The vote was widely unexpected throughout the European Union and to some analysts indicated that nationalistic or anti-globalisation mentalities ran deeper than expected.

The fear of a growing nationalistic mentality only worsened when Trump was elected US President in November.

One of the primary reasons for the Euro’s poor performance in late-2016 has been concerns of what may happen to the currency in the event a key Eurozone member pulls out of the bloc due to a Brexit-like vote.

Crumpled Euros

The Brexit and Trump votes worsened already deepening fears that it may be only a matter of time until a country using the Euro decides to pull out of the bloc in what is perceived to be the single biggest threat to the currency project’s future – a project which has still only been in existence for under two decades.

Additionally, throughout 2016 Austria had been embattled in a presidential election process that continued to see obstacles – including a re-run of the election being postponed due to faulty glue on ballot papers.

While the eventual election result in December ended with a decisive win for Green party-affiliated Alexander van der Bellen, his far-right opponent Norbert Hofer attained the best result of a far-right candidate in the Eurozone to date.

Some analysts also perceived Italy’s referendum vote against constitutional adjustments in December to be an anti-establishment and nationalist vote, motivated by the urge to oust Prime Minister Matteo Renzi. Renzi resigned following the vote and Italy’s President, Sergio Mattarella, successfully replaced him with Paolo Gentiloni.

However, with Italy’s Five Star Movement party becoming more popular, as well as France’s National Front (FN) and its leader Marine Le Pen increasing in popularity, concerns are rife that the increase of populist nationalism could spread to Eurozone nations in 2017 and beyond.

Here’s what the markets will be watching out for in the year ahead: the Netherlands’ general election in March, France’s in April and May, and Germany’s federal election in October  – in which Chancellor Merkel will be standing for a fourth term. Any wins or increases in popularity for populist, nationalistic parties in the Eurozone could cause serious panic in markets.

2016: One for the Economic History Books?

It might sound like a stretch to say that 2016 was a world-changing year for the global economy, but in several countries it will mark a significant turning point in the very least – particularly in the case of Britain as it looks set to turn its back on the European Union in a potentially irreversible UK-EU divorce.

For now, the changes we’ll see in other major economies like the US and Eurozone are big unknowns. It’s possible that Trump’s economic and political changes to the US will be bigger than feared, but they could also be smaller. It’s possible the European Union may never be able to heal the cracks that have emerged, and they may well worsen, but the situation could also stabilise.

Keeping the above in mind, 2017 could prove to be an even bigger year for economic shifts than 2016.

That being said, this article doesn’t even explore all the other major economic and political events that have occurred outside of Europe and the USA, such as the shocking Chinese stock market crash right at the beginning of the year, or the perception from some analysts that the Bank of Japan may be nearing the end of its infamous easing bias.

Over in Australasia, prices of iron ore finally escaped from the rut seen in recent years and even climbed above US$80 per tonne, while dairy prices finally began recovering.

And when it comes to commodity price news, little shocked the markets more in 2016 than OPEC’s historic plans to curb oil production in order to stimulate prices in an effort to end the oil price crisis of recent years.

Looking back on it all, it’s quite shocking to see how much the global economic outlook has shifted in just one year – as if it took an unexpected fork in the road.

However, it’ll be the years ahead that really contextualise and decide just how big 2016 was in retrospect. With the Brexit process and Trump Presidency set to begin within the next few months, 2017 is already shaping up to be an impressive following act.

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