2016-2020_Financial_Plan_Web

Economic Overview

A shift is underway to transition China’s economy towards domestic consumption while reducing reliance on exports and government investment. The government is taking steps to address over-supply of housing in urban areas by increasing urbanization through movement of its rural population. The plan includes removal of barriers to migration for rural residents, including, access to education and medical care. Urbanization of China’s massive rural population, estimated at approximately 624 million people, will not only increase demand for housing but will increase the overall income of its people, leading to increased domestic consumption. The US economy is expected to gain further momentum in 2016 with GDP growth forecasted at 2.6%. The US labour market continues to improve with over 200,000 new jobs created each month last year. During the fourth quarter of 2015, the unemployment rate reached a seven year low of 5% while the final tally saw 2.65 million jobs added during the year. Based on this strong employment growth, the US Federal Reserve (Fed) raised its key interest rate by 0.25% in December 2015, the first such increase in almost 10 years. Analysts predict that the Fed will further raise its key interest rate by up to a full percentage point during 2016, albeit gradually. The Fed will be looking for target inflation to reach 2% and a return to full employment as a guide to further rate increases. A faster “normalization” of interest rates is expected once these two conditions are met. The slowing growth of the working-age population coupled with reduced excess labour supply will result in less new job market entrants going forward. The Fed predicts that an increase of 100,000 jobs per month going forward will be sufficient to keep the unemployment rate within a range that it considers full employment. As the labour market improves, wages should follow suit. Incomes are forecasted to rise by 3% in 2016. These wage gains, coupled with improving confidence in the economy and increased employment, are expected to fuel consumer demand. Solid gains in the housing market and auto sector are also expected this year. The US dollar enjoyed a 10% appreciation (trade-weighted) during 2015. The dollar’s surge was driven largely by divergence in economic performance, and hence, expectations about monetary policy between the US and the rest of the world. The upward trend is expected to continue in 2016 but some analysts predict that the US dollar is close to peaking. Estimates indicate that there is almost $10 trillion worth of US dollar denominated debt held by non-financial entities outside the US. The record surge in USD has now made it more difficult for those holders to service that debt. At 18% of world GDP (excluding the US), the exposure of debtors to a strengthening US dollar is now twice as large as it was back in 1997 when a US dollar surge contributed to a financial crisis in Asia. UNITED STATES

2016-2020 FINANCIAL PLAN

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