The chief analyst's three scenarios for the global economy

Bo Bejstrup Christensen sets his economic outlook for the rest of 2016 – including worst and best case.

Published 25.07.2016


Both the Brexit referendum and the development in China's housing market will have direct consequences for the global economy.

When 52 percent of the UK's electorate voted on 23 June to leave the EU, the outlook for the global economy for the rest of 2016 had to be revised. In the same way, the development in China's housing market may affect large parts of the global economy to a greater or lesser extent.

Here, Danske Invest's chief analyst, Bo Bejstrup Christensen, explains his expectations for the second half of 2016, and what he deems to be the best and worst possible scenarios for the global economy going forward.

1. The expected scenario
Bo Bejstrup Christensen expects the global economy to continue to grow in the second half of the year, led by the US and China, but that this growth will lose momentum as China's housing market is  stagnating and Europe is experiencing significantly weaker growth, perhaps even with potential for recession.

The Eurozone has seen positive growth for almost three years, stimulated by a weaker currency, the low oil price, decreased interest rates, a more expansionary fiscal policy and, not least, a stronger banking system. But then the UK had its referendum.

"Right now, all the focus is on Europe. We have to conclude that with the severe political shock as a consequence of Brexit, our best assessment is that the Eurozone will lose a lot of momentum in the second half of 2016r," says Bo Bejstrup Christensen.

He estimates that growth is currently at around 2 per cent in the Eurozone, but that it will fall to below 1 per cent and may even become negative in light of the result of the Brexit referendum,. This will be the case if businesses respond to the Brexit referendum and the enormous uncertainty its result has created with greater caution, stock reductions, expanded liquidity and a scaling-down of both investments and employment. He assesses that the UK will face direct recession in the second half-year.

"Would that be a disaster? No. These political shocks have a severe effect, but are over relatively quickly, after which we will adjust to the new reality. Even if this reality entails great political uncertainty for the indefinite future," says Bo Bejstrup Christensen.

He believes that growth will slowly begin to increase again in the beginning of 2017, supported by the central banks doing everything that is required in order to stabilise the banking system.

In the US, where growth is currently around 1.5 per cent, Bo Bejstrup Christensen expects that a solid banking system and a strong housing market will be enough to stimulate growth to 2.0-2.5 per cent in the second half of the year. This will lead to a reduction of unemployment, exerting further upward pressure on wage and price inflation. In this scenario, the Fed will raise the interest rate in the second half of 2016 or during 2017, is his assessment.

The picture is different in China, where the current growth of around 6.5 percent should fall to around 5 percent at the end of 2016, explains Bo Bejstrup Christensen. So far, China's growth has been driven by an expansionary fiscal policy and strong expansion of the housing market, since the government has eased access to housing loans. However, he assesses that this stimulus from the government will now diminish.

2. The worst scenario
The worst scenario which the global economy may experience over the next six months is primarily driven by Europe.

"In the worst scenario for the global economy, the shock from Brexit is so strong that there will not only be mild recession, but very strong recession in Europe," says Bo Bejstrup Christensen,
"The prospect of the UK leaving the EU, and the uncertainty of what the future may bring, can lead businesses to decrease their investments, and lay off more people than we expect. In this case, private consumption will be severely hit, and growth will decline by more than we expect at the present time," he says.

Equally, the effect in this scenario on the rest of the world will also be more pronounced, and the US and China will suffer further. The worst scenario therefore also entails that China will slow down even more than anticipated, based on the combination of a weaker than expected housing market and a severely affected export sector.

For the US, even the worst scenario will be okay, and entail businesses being rather more cautious, due to the unrest concerning Brexit in Europe and the upcoming presidential elections on the domestic front. This will result in declining growth in the US, instead of a small increase.

"We do not assess that there will be a recession in the US, among other things because the housing market will continue to expand. Residential construction is not keeping up with the underlying demographic development and there is latent demand that may be released if the banks are a little less restrictive in terms of their lending policy," Bo Bejstrup Christensen explains.

He says that while today between 1.2 million and 1.3 million homes are built annually in the US, there is a need for around 1.5 million homes, just to keep up with the population growth and demolitions. This will help to support residential construction.

3. The best scenario
The best scenario for the global economy is that the recession in the UK turns out to be very mild, if there is a recession at all, and that growth will return as early as in the first half of 2017. "The same mechanism will then apply to the Eurozone, and in this case growth will stabilise or increase again towards the end of the year, or at the beginning of 2017," Bo Bejstrup Christensen explains.

"The positive scenario is also that we are mistaken regarding China, and that the improvement we have seen in the housing market is actually more viable than we expect. This will entail that sales activity, which has risen by 30-35 per cent, will stay high enough to reduce the large  amount of unsold homes - especially in small towns," he says.

"In this scenario, residential construction may see a flat development or an increase rather than a decline, leading to better growth than expected in the Chinese economy," says Bo Bejstrup Christensen.

In the best scenario for the US, the banks will continue to ease access to housing loans, and the oil industry will start up again, leaving the crisis behind.

"The best scenario also entails that international companies adapt to the stronger dollar and, above all, that the housing market gears up strongly. In this case, residential construction and thereby housing prices will increase by significantly more than we expected," says Bo Bejstrup Christensen.

This scenario will lead to a strong American economy and the Fed will raise the interest rate faster than expected - and perhaps even late in Q3 or the start of Q4 2016, he explains.