Across a wide range of commodities, prices are falling and sometimes falling fast. The Bloomberg commodity index – which acts as a benchmark for commodity investments – fell to its lowest level in five years this week. Prices are being pushed down by the increasing supply of most commodities and a weakening global economy, including a slowing China, the world’s largest consumer for many of these raw materials. Whether it is oil, corn, iron ore, coal, cotton or copper, prices are falling quickly.
The International Monetary Fund estimates that global commodity prices are 8.3 per cent lower than at the start of the year. In its recent World Economic Outlook report, the IMF demonstrated how a $20-a-barrel oil price decline would increase the real income of consumers, boosting domestic demand and growth in consuming countries and hitting exports and demand in producer nations. The fund estimated the net effect would increase world gross domestic product 0.5 per cent alone, and if economic confidence were improved as a result, that figure could rise to about 1.2 per cent. Gavyn Davies, chairman of Fulcrum Asset Management, says the figures were plausible and by any measure “quite big”.
Andrew Kenningham, economist at Capital Economics, has calculated that an equivalent change would transfer $640bn – or nearly 1 per cent of world GDP – from oil producers to consumers. “Our rule of thumb is that consumers typically spend half of their windfall. This is $320bn or around 0.5 per cent of world GDP, ” he says.
With other commodity prices falling alongside oil, the effects can be expected to amplify, benefiting global growth but also creating losers as well as winners. The effects are most obvious in growth forecasts. In 2011, when commodity prices were expected to remain persistently high, the IMF forecast Brazil’s economy would expand more than 4 per cent in 2014, a rate it would be able to sustain into the medium term. Now it is expecting near stagnation this year with a slow climb towards a 3 per cent medium-term rate. Russia, which also has to deal with the added impact of western sanctions, shares the same fate.
Some effects can be complicated, however. As well as redistributing money between countries, there are also winners and losers within the same nation. While falling oil prices act as a tax cut for US motorists, it hits the country’s shale oil industry. In 2011, the surge in food prices was a boon to Brazilian agriculture but a huge burden on its urban poor.
Exchange rate movements can complicate the picture, since most commodities are priced in dollars. In parts of Asia currencies are falling relative to the dollar. As a result says Jeff Currie, head of commodities research at Goldman Sachs, consumers in India are not seeing big gains because oil prices in rupees are not falling fast, and in countries such as Indonesia, the government is offsetting lower fuel prices with cuts in fuel subsidies so, again, consumers have not seen the full benefit. After taking account of currency and tax changes, Mr Currie says the US is the only country in which consumers are likely to see a big benefit.
As a big consumer and importer, the eurozone will benefit from the turndown in commodity prices, but economists warn Europe must avoid getting too much of this good thing. Falling commodity prices could tip the eurozone into outright deflation, potentially delaying consumer purchases on the expectation of even lower future prices.
This is all theoretical, but could undermine efforts by the European Central Bank to stabilise medium-term expectation of inflation to about 2 per cent a year. Thomas Harjes of Barclays says: “Market-based measures of inflation expectations are increasingly indicating that the ECB is at risk of losing its credibility to return inflation back to the close-to-2 per cent target, even over the medium term.” (www.chinainout.com)
