Market developments

Macro-economy

In 2016 global economic growth, at 3.1%, roughly equalled the growth rate seen in 2015. This means that for the fifth year running economic expansion lagged slightly behind the average rate for the past fifty years.

2016 did not have an auspicious start, due to a sharp fall of commodity prices and uncertainty about economic growth in China. Later in the year, the United States had a weak fourth quarter after the Federal Reserve (Fed) raised its interest rate for the second time in the last few years. In addition, with the Brexit and the election of Trump coming up, growing populism in Europe and the US led to political uncertainty. In the second half of the year consumer and producer confidence improved, which was surprising given the general expectation that a “no” vote in the UK referendum and the election of Trump would undermine economic growth. The large emerging economies registered a net expansion.

The anti-establishment movement became increasingly apparent worldwide. Populism was reflected in growing nationalism. Opposition against a relaxed immigration policy intensified and opponents of trade agreements exhibited emerging economic protectionism.

Inflation and monetary policy

Inflation in the eurozone fluctuated around zero percent during the first half of 2016. In the latter half of the year higher oil prices began to impact general price levels, causing inflation to accelerate to 1.1% in December. Throughout the year, fluctuations in core inflation remained confined to a narrow range of 0.7% to 1.0%. The European Central Bank (ECB) cut its interest rate, launched a corporate bond purchase programme and relaxed the conditions for the purchase of sovereign bonds.

In the US, wage costs rose almost 3% year-on-year. This had little impact on inflation. The underlying deflator for consumer spending rose 1.6%. During its last meeting of 2016 the Fed raised its economic growth and inflation projections for the first time in ages and raised its policy rate by 25 basis points.

Japan came close to deflation in 2016, as its rate of inflation fell from 0.8% to 0.0%. The Bank of Japan was concerned about the yield curve levelling off and introduced new policy measures in order to fix the long-term interest rate.

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