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Global Economic Prospects Commodities at the crossroads

Global Economic Prospects Commodities at the crossroads. Uri Dadush Andrew Burns World Bank Brussels, Dec. 9, 2009. Macro Outlook : Main Points. The financial crisis is massive and global US sub-prime was the crisis trigger, but vulnerabilities run much deeper and wider

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Global Economic Prospects Commodities at the crossroads

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  1. Global Economic Prospects Commodities at the crossroads Uri Dadush Andrew Burns World Bank Brussels, Dec. 9, 2009

  2. Macro Outlook : Main Points The financial crisis is massive and global US sub-prime was the crisis trigger, but vulnerabilities run much deeper and wider Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Continued vigorous policy response required to mitigate effects and prevent recurrence

  3. Shipping costs are plunging Baltic Exchange Dry Index

  4. A massive, global, crisis World output growth down from +3.5% in 2006-2007 to -2.5% estimated in the current quarter Stock markets around the world fall about 50% from their peak in Summer 2007 In the U.S., unemployment (a lagging indicator) set to rise from 4.5% in 2007 to 8% or higher in 2009 Oil prices fall from $150 at the peak in Spring 2008, to less than $50; prices of metals also collapse.

  5. Equity markets plummet... weakening exchange rates MSCI Equity market index ($), Jan-1 2007=100 Exchange rates, LCU/USD index Jan-01-2008 =100* * increase implies weaker local currency Brazilian real

  6. …while emerging markets bond spreads widened substantially Emerging-market bond spreads Jan 2007 – Nov 18, 2008 Basis points Source: JPMorgan

  7. ..and corporate bond spreads have surged Emerging-market corporate bond (CEMBI) spreads Basis points Source: JPMorgan

  8. Examples of countries most affected by financial turmoil High-Income: Iceland, Australia, Hungary, Korea Middle-Income: Jamaica, Ukraine, Mauritius, Kazakhstan, Lesotho Low-Income: Pakistan, Zambia, Ghana, Madagascar

  9. Financial crisis may have culminated in early October Spread between 3-month US$ Libor and policy interest rate, basis points

  10. What caused the crisis? US vulnerabilities 1. Monetary and Fiscal policies too loose too long 2. Innovation and Regulatory Failure 3. Excessive household debt and bank leverage Global vulnerabilities 1. Demand Boom and Inflationary Pressures 2. Large and widening external imbalances Triggers 1. Subprime securities collapse 2. Lehman failure

  11. A major sustained world boom preceded Percent change, year-on-year Global IP Metal Prices Source: World Bank.

  12. Inflation surged Median inflation rates: Jan 2000 to Sep 2008 Developing countries High-income OECD Source: World Bank.

  13. U.S. policy rates left too low for too long Real Fed Funds Target Rate (Deflated by CPI) Jan. 1991 – Sep. 2008 percent Source: Federal Reserve, U.S. Department of Commerce and World Bank.

  14. U.S. fiscal surplus turned to deficit in 2001 General Government Financial Balanceshare of GDP, 1990 to 2007 Percent of GDP Source: U.S. Department of Commerce and World Bank.

  15. U.S. Households ran up record debt as home prices surged Household debt to GDP (%)and House price index1980 to 2008 Percent of GDP Index, 2000=100 Household Debt to GDP(%) Left axis House price index Right axis Source: Federal Reserve Board, RBS:Case-Schiller, World Bank.

  16. External Vulnerability Current account balance (Developing oil importers x China) (% of GDP) , Overall budget balance (% of GDP) Source: World Bank.

  17. High-income countries in recession Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized Q1 Q2 Q3 Source: World Bank and National Agencies.

  18. Decline in import growth affecting exports from developing countries... Percentage change(12m/12m) Annual growth of import volumes U.S. imports Latin American exports Source: World Bank

  19. World trade to contract in 2009 for the first since the early 1980s annual percent change in trade volumes Developing country exports World trade volume Source: World Bank.

  20. Oil Price Forecast $/barrel Source: DEC Prospects Group.

  21. Food price forecast Index (2000 = 100) Source: DEC Prospects Group.

  22. Private capital flows set to decline more sharply still in 2009 Net private debt and equity flows 1990-2007, projected 2008-09 Percent $ billions Percent of GDP (right axis) Source: World Bank.

  23. Investment in MICs to reduce sharply Annual fixed investment growth1992 to 2007, projected 2008-2010 Percent Source: World Bank.

  24. Declining Investment Growth of real fixed investment, Q1-2006 to Q3-2008, percent yr on yr Venezuela Russia Thailand Indonesia Source: Haver Analytics.

  25. Sharp decline in GDP growth expected Growth of real GDP, percent Developing High-income Source: World Bank.

  26. Great depression: Sui Generis US GDP, annual growth Price volume Source: BEA

  27. The (hoped for) drivers of recovery Turn in the housing cycle Debt work-outs Greed Realignment of exchange rates Falling commodity prices, declining inflation and space for fiscal and monetary stimulus The credibility of the state

  28. How the world will change: some (incomplete) longer term implications Fiscal burden Monetary overhang Moral Hazard Nationalized Banks (and other firms?) Large reserve accumulation encouraged Opposition to the free market paradigm and to global integration will increase

  29. Slowing growth across all regions Annual GDP growth; Percent 2007 2008 2009 2010 Source: World Bank.

  30. Slowing growth across all regions Annual GDP growth; Percent 2007 2008 2009 2010 Source: World Bank.

  31. Policy Directions as illustrated by G-20 Fighting this Crisis 1. Global Fiscal Stimulus 2. Restraining Protectionism 3. Enhanced IMF Resources Preventing the Next One 1. College of supervisors 2. Managing systemic risk of CDS 3. Oversight of Credit Rating Agencies 4. Enhanced disclosure/common accounting Reflecting New Realities/Enhancing Legitimacy 1. G-20 or G-8? 2. Developing countries in Global Stability Forum, IMF and WB

  32. Commodity markets: prospects and policy challenges • Recent commodity boom was more durable and larger than earlier ones but otherwise classic • While lower than in the recent past, prices are expected to remain much higher than in the 1990s – which should ensure sufficient supply to meet demand • In the right policy environment, commodity wealth can be pro-growth • Policy improvements could reduce both the likelihood of future sharp price hikes and their negative consequences

  33. The recent boom was one of the largest, longest lasting and involved more commodities MUV-deflated US$ (2000=100) Agriculture Metals Oil Source: World Bank

  34. As with earlier booms, the slowdown in global growth has brought the boom to an end Real prices of internationally traded commodity prices in developing countries, CPI-deflated Indices, Jan. 2000=100 Energy Food Metals and minerals

  35. Sustained rapid developing country growth Sharp increase in Chinese demand for metals Decades of weak prices, during which as much as ½ of global demand was being met from idle capacity Surge in demand for some food crops for biofuel production Causes of the boom

  36. Commodity markets: prospects and policy challenges • Recent commodity boom was more durable and larger than earlier ones but otherwise classic • While lower than in the recent past, prices are expected to remain much higher than in the 1990s – which should ensure sufficient supply to meet demand • In the right policy environment, commodity wealth can be pro-growth • Policy improvements could reduce both the likelihood of future sharp price hikes and their negative consequences

  37. Slower population growth and lower investment rates will ease commodity demand Growth of GDP, annual average (percent) Developing countries High-income countries Source: World Bank, Linkages Model.

  38. Technological progress increases the efficiency of resource use Commodity intensity of GDP, index 1971 = 1 Source: World Bank.

  39. Reserves of commodities reflect incentives and remain ample Source: World Bank.

  40. Higher prices should provide the incentives to continue ensuring additional supply from non-traditional sources Global oil production, millions of barrels per day Source: Sandrea and Sandrea (2007).

  41. Globally, agricultural productivity growth exceeds demand growth Projected annual average growth rates 2000-2030, per cent Source: Productivity (Coelli and Rao, 2005); Food demand, FAO (2006)

  42. Future policy on biofuels may affect food prices Oil < $50 Oil > $50 Source: DEC Prospects Group.

  43. Losses 25+ % 15-25% 5-15% 0-5% Gains 25+ % 15-25% 5-15% 0-5% Not Available Climate Impact : Agriculture 2008-2080 Without Carbon Fertilization Source: Global Warming and Agriculture: Impact Estimates by Country William R. Cline CGD, 2007

  44. Commodity markets: prospects and policy challenges • Recent commodity boom was more durable and larger than earlier ones but otherwise classic • While lower than in the recent past, prices are expected to remain much higher than in the 1990s – which should ensure sufficient supply to meet demand • In the right policy environment, commodity wealth can be pro-growth • Policy improvements could reduce both the likelihood of future sharp price hikes and their negative consequences

  45. Commodity dependent countries tend to grow less quickly than more diversified exporters Average GDP growth rate, 1980-2006 (percent) Source: World Bank

  46. Commodity dependent countries tend to be poor, but commodity rich countries tend to be rich Value of per capita primary commodities in exports (US$ thousands) / Share of primary commodities in total merchandise exports (%) Source: World Bank

  47. Impact of severe shocks on economic progress Average volatility of export revenues, 1981-2006Standard deviation of percentage change Source: World Bank

  48. Commodity markets: prospects and policy challenges • Recent commodity boom was more durable and larger than earlier ones but otherwise classic • While lower than in the recent past, prices are expected to remain much higher than in the 1990s – which should ensure sufficient supply to meet demand • In the right policy environment, commodity wealth can be pro-growth • Policy improvements could reduce both the likelihood of future sharp price hikes and their negative consequences

  49. Poverty impacts depend on actual food price increases, which varied widely across countries Percent increase in real food prices, Dec. 2005 – Dec. 2007

  50. Overall global poverty increased by 130-155 million Increase in poverty rate, percent of population

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