The global economy entered 2016 in a state of transition. The world's economic centre of gravity is shifting from the developing world to the developed, with the former most clearly represented by China and the latter by the United States. This change has been under way for at least the last 18 months as the US dollar strengthened alongside rising economic problems in China. But the December hike in the US inflation rate and the simultaneous depreciation of the yuan have thrown it into sharp relief, hammering home the message that observers and market players will have to swiftly come to terms with a very different world. As a result, January has been a turbulent month, and asset prices have swung sharply for reasons unrelated to changes in the underlying factors that determine a company's value.
The latest transition marks the end of the previous phase, which began in 2008 when the financial crisis dealt a heavy blow to the global economy, especially the developed world. At the time, China's ability to go deeper into debt enabled it to extend its growth model for several more years. The problem was, from 2008 onwards, Chinese growth was based less on demand from healthy Western consumer markets, as it had been for the previous decade, and more on borrowed money. This model had a built-in expiration date, since rising debt would at some point become unmanageable - a point China is now reaching. And China's suppliers are feeling the consequences. The Chinese economy's persistent growth after 2008 enabled emerging, commodity-exporting markets to continue with business as usual; when it ended, much of the developing world found itself sharing China's downturn.
Meanwhile, economies in the developed world have spent the last eight years trying to recover from the setbacks they suffered in 2008. As is so often the case, the US has been the first to emerge, boasting a healthy services economy that more than makes up for a sluggish manufacturing sector more reliant on foreign demand. The United Kingdom and other parts of Europe are also seeing improvement, and high unemployment rates on the continent are slowly beginning to come back down. These gains come at the expense of the world's emerging markets and China: Low commodity prices are a producer's problem but a consumer's boon. And so, the economic positivity already beginning to emerge in the US and Europe suggests an undercurrent of optimism for Western economies in the coming months.
That said, the developed world isn't yet in the clear - far from it. Europe continues to be weighed down by heavy debt burdens that will take a lengthy period of strong growth to lift. While the European Central Bank's quantitative easing policies, which now have been extended to next year, partially obscure the threat these debts pose to Europe, those programmes will eventually come to an end. When they do, the continent's bigger underlying issues are sure to re-emerge. In the meantime, Europe is tearing itself apart trying to cope with massive flows of migrants that will only increase as the weather improves. The resulting restrictions on the free movement of people are chipping away at the foundations of the European Union, with international markets watching closely all the while. The uncertainty created by such moves will work against the positive impact that cheap commodities have had on European economies, and possibly even have a dampening effect on growth.
And as the United Kingdom's referendum on EU membership draws closer, the fears of a "Brexit" will further undermine the pound and eventually spread to the euro.
As the year progresses, some of these changes should start to shake out as the markets grow accustomed to the new global environment. But the wild swings we have seen last month will not disappear completely. This year is set to be a volatile one, and sporadic bursts of bad news out of Europe and China will probably elicit strong reactions from the markets. Meanwhile, currencies, which have been gaining importance since the central banks' policies started to diverge, are poised to become a battleground for the world's economies as policy decisions in one will force others to recalibrate. There will certainly be moments of tension. But relative to the shocks the global economy experienced during its last major transition in 2008, perhaps tense moments should be regarded as a blessing.
• This analysis was originally published by Stratfor.com, a global intelligence and advisory firm based in Austin, Texas. The writer is Stratfor's economy analyst.
