In the United States, meanwhile, steady GDP and job growth has been constrained by weak productivity gains, writes the American Enterprise Institute’s James Pethokoukis. Without increased productivity delivering higher living standards, the United States could face decades of “unhealthy economic populism.”
Europe continues to face the risk of debt crises, writes CFR’s Robert Kahn, but the most dangerous economic risk for the continent in 2016 is “a growing populist challenge from both the Left and Right,” which could create economic-policy uncertainty and constrain policymakers.
Kenneth S. Rogoff, senior fellow for economics, Council on Foreign Relations: The best thing that can be said about the global economy as 2016 begins is that it could be doing much worse.
In Europe, Greece’s Syriza government—closely adhering to the advice of left-leaning U.S. economists—has flirted with pushing the Greek economy off a cliff. The country’s membership in the euro zone survived, however, even if the Greek government needlessly squandered both precious time and tens of billions of dollars.
Europe, like Japan, is also facing profound existential problems around aging populations, difficulty in absorbing refugees and immigrants, and slow productivity growth due to lack of structural reform. As 2016 dawns, low oil prices and weak currencies are continuing to keep both economies on positive—though not exactly vigorous—growth trajectories.
Meanwhile, the Chinese government suffered a major dent in its credibility by badly mishandling a collapsing stock-market bubble, raising questions about how well it will be able to manage the ongoing shift in its economy to slower, but more sustainable, growth. Although the government has managed to alleviate any immediate sense of crisis, the challenges in 2016 remain formidable.
Between a slowing Chinese economy, collapsing commodity prices, and the beginning of the U.S. Federal Reserve’s rate-hiking cycle, many emerging-market economies have become quite fragile, notably Russia and Brazil. Twenty years ago, with inflexible exchange rates and massive foreign-currency debt, the kind of duress these countries are experiencing now would have inevitably led to financial crisis. Now, with flexible exchange rates and most government debt denominated in local currency, their economies are more robust: They are suffering deep recessions, yes, but not yet the start of “lost decades.” However, with Brazil’s multibillion-dollar corruption scandal deepening by the day and plummeting oil prices undermining Russia’s fiscal sustainability, 2016 will further test these economies.
Can the U.S. economy continue to recover even if growth elsewhere is tepid? For now, it seems that advanced economies will continue to heal from the financial crisis, albeit still suffering from hangovers due to high debt levels and post-crisis trauma, especially in Europe. Still, 2016 promises to be anything but a quiet year.