Annual summary
In 2016 it once again became clear that developed and emerging countries were facing different economic climates. While the economic cycle was consolidated and even gained ground in advanced economies, emerging countries continued to be plagued by significant imbalances.
In Europe the year was characterised by significant geopolitical challenges that raised doubts as to the economic cycle. Without a doubt, the most important was the Brexit referendum. Uncertainty was initially generated by this process itself and, afterwards, by the outcome of the vote. Despite this concern, the European economy proved to be highly resistant and GDP in the third quarter of 2016 grew by 1.7%. The central banks contributed significantly to this outcome. The determination of the European Central Bank and the Bank of England to continue supporting the economy through accommodating monetary policies was a key supporting factor. In this regard, both banks decided not only to cut their lending rates, but also to strengthen their respective asset purchase programmes.
On a more local level, Spain was once again leading the growth of developed countries. Despite significant political challenges, the economy grew 3.3%. The excellent performance of internal demand and business investment were key, not to mention the improvement in the labour market. The number of unemployed dropped by 390,540 and the number of contributors to the Spanish social security system rose by 540,655 people.
The United States once again reported solid growth. The GDP rose by 1.7% in the third quarter. The good progress of the job market was also consolidated. The employment rate fell to 4.7% in December 2016, compared to 5% at the end of 2015, levels that can be considered full employment. This was accompanied by a reduction in borrowing costs. The Federal Reserve only raised its lending rate once at the end of the year. Specifically, the rate was increased by 25 basis points to a range of 0.50%-0.75% at its meeting held on 14 December.
Emerging economies continue to suffer. The lack of structural reforms, low prices for raw materials and the significant appreciation of the US dollar became serious challenges, especially for those countries with a higher percentage of debt in US dollars and greater dependence on tax revenue from oil. GDP growth continued to shrink in Brazil (-2.9% in the third quarter) and in Russia (-0.4%). In China the economy continued to show significant dependence on credit and the GDP grew by 6.7%. Against this complicated backdrop, the positive exception was India. The reformist government and the drop in the price of crude oil in the first half of the year helped the country post a growth rate of 7.3% in the third quarter.
In short, the global economy grew at a moderate rate thanks to the progress of developed countries, while emerging countries continued to be seen as the weakest link in the chain.
Monetary policy was characterised by its differences among the main developed economies. Central banks in Europe continued to have clearly expansive policies, whereas the Federal Reserve began to tighten its monetary policy in the US, albeit slowly and prudently, as its lending rate was only increased by a quarter of a point throughout the year.
The global economy grew at a moderate rate thanks to the progress of developed countries, while emerging countries continued to be seen as the weakest link in the chain.
In 2016 fears of entering a deflationary cycle were abated as the year went on, however, inflation levels remained very low. Inflation in the eurozone stood 1.1% in December. This enabled the ECB to continue with its policy of monetary stimulus. In March, the ECB not only expanded its asset purchase programme, but also cut the intervention rate. More specifically, it reduced the lending rate by 5 basis points to 0%; the deposit rate by 10 basis points to -0.40%; and the marginal lending rate by 5 basis points to 0.25%. These levels remained unchanged until the end of the year. In addition, the ECB announced that certain non-banking corporate bonds would be included in its asset purchase programme and launched the TLTRO II programme (targeted longer-term refinancing operations) with a potential maximum amount of 1.7 trillion euros, which is equal to almost 1.6 times the Spanish GDP. The Bank of England also opted for a more lax monetary policy to offset the potential consequences of Brexit. In addition, the lending rate was cut from 0.50% to 0.25%, the stimulus package was increased from GBP 375 billion to GBP 435 billion, and asset purchases were expanded to include corporate bonds in the amount of GBP 10 billion.
The trend was very different in emerging countries. Despite the high levels of inflation in certain countries, central banks were forced to cut interest rates in order to counteract the weak economy. In Brazil, its benchmark rate fell from 14.25% to 13.75%, while the lending rate in Russia dropped from 11% to 10%.
The appreciation of the US dollar as a result of expected increases in interest rates by the Federal Reserve and the improvement in the economic outlook stands out in the currency market. The value of the US dollar against the euro went from around 1.09 at the end of 2015 to 1,052 at the end of 2016. However, the worst trend among currencies of developed countries was the exchange rate with the pound sterling. Following the outcome of the Brexit referendum, the British currency depreciated significantly, falling 13.6% in the year. Accordingly, the yen's role as a safe-haven currency was confirmed. In the first half of the year, this currency appreciated against a more uncertain backdrop, while the improvement in the economic outlook at the end of the year had the opposite effect. In any case, the currency market was characterised by significant volatility. As shown, the US dollar reached 1.16 against the euro in May, whereas in December it stood at 1.03, and the Japanese yen went from 132.3 against the euro in January to 109.5 in June following the Brexit referendum.
The changes in the main stock market indices in 2016 were characterised by volatility. The year began poorly for most indices, however, there was a significant upturn in yield at year-end. On the negative side, China's CSI 300 dropped 11.3% and the Ibex-35 fell 2% year on year. On the positive side, the Bovespa rose 38.9%. Despite the difficult economic situation in Brazil, expectations of a change in government drove share prices. The FTSE 100 rose by 14.4%, despite the Brexit referendum, although the depreciation of the pound sterling, which fell 13.6%, virtually cancelled out this progress entirely. The S&P 500 posted a 9.5% increase. On the whole, return on equity demonstrated significant resilience against geopolitical risks.
The performance of the fixed-income market was also not exempt from this volatility. The difficult start to the year continued to affect fixed income until well into 2016. The ECB's bond repurchase programme significantly contributed to this trend. However, the last part of the year was accompanied by a substantial improvement in the economic outlook. This, together with the upturn in the price of crude oil at the end of the year, caused inflation expectations to increase. The result was a considerable increase in the return on bonds, which led to a drop in prices. This trend was more pronounced in maturities with longer terms, which gave rise to a substantial increase in the slope of the yield curve.
The table below shows, in local currency, the trend in the main stock markets worldwide in 2015 and 2016.
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