Global Economic Prospects Commodities at the crossroads

1. Global Economic Prospects Commodities at the crossroads Andrew Burns World Bank Paris, Dec. 8, 2009

2. Macroeconomic prospects The financial crisis is massive and global Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Food and fuel crisis has left developing countries more vulnerable Continued vigorous policy response required to mitigate effects and prevent recurrence

3. A massive, global, crisis World output growth down from +3% in 2006-2008 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.

4. High-income OECD countries falling into potentially deep synchronous recession Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized Q1 Q2 Q3 Source: World Bank and National Agencies.

5. Macroeconomic prospects The financial crisis is massive and global Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Food and fuel crisis has left developing countries more vulnerable Continued vigorous policy response required to mitigate effects and prevent recurrence

6. Output in emerging markets also slowing sharply Industrial production, annualized percent change, 3m/3m China Developing excl. China High-income OECD Source: World Bank

7. Crisis has sharply tightened credit conditions in developing countries Emerging-market bond spreads Basis points Source: JPMorgan

8. Gross private capital flows to developing countries contract by nearly one-half Bank lending, bond and equity issuance $ billions (12-month moving average) August 2007 Bank lending Equity issuance Bond issuance Source: World Bank.

9. 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.

10. Macroeconomic prospects The financial crisis is massive and global Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Food and fuel crisis has left developing countries more vulnerable Continued vigorous policy response required to mitigate effects and prevent recurrence

11. For middle income countries tight credit conditions are expected to cut sharply into investment spending in 2009 Annual fixed investment growth1992 to 2007, projected 2008-2010 Percent Source: World Bank.

12. For low-income countries the main transmission mechanism will be from trade, commodities and remittances Terms of trade for Low-income countries • Exports hit by declining OECD and middle-income demand; terms of trade – where earlier a benefit – moves against economies. • Slower gains in worker remittances and tourism amidst OECD recession carry negative effects; fears of shortfall in aid are widespread. Projected growth in remittance flows South Asia Africa Source: World Bank.

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

14. 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.

15. Macroeconomic prospects The financial crisis is massive and global Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Food and fuel crisis has left developing countries more vulnerable Continued vigorous policy response required to mitigate effects and prevent recurrence

16. Food and fuel shock has left developing countries more vulnerable (1) Median inflation rates: Jan 2000 to Sep 2008 Developing countries High-income OECD Source: World Bank.

17. Food and fuel shock has left developing countries more vulnerable (2) Current account balance (Developing oil exporters - x China) (% of GDP) , Overall budget balance (% of GDP) Source: World Bank.

18. Macroeconomic prospects The financial crisis is massive and global Despite improved fundamentals, developing countries are being engulfed by the crisis Very severe downside scenarios possible, but most likely is an extended global recession Food and fuel crisis has left developing countries more vulnerable Continued vigorous policy response required to mitigate effects and prevent recurrence

19. Developing country policy prescriptions: Vigilance and prudence • Watch carefully for signs of domestic banking-sector stress and react swiftly – rapid enlistment of IMF support where necessary • Allow automatic stabilizers to operate, active countercyclical policy an option in only few countries • Maintaining spending, especially in infrastructure and other investments that will contribute to future output is a key desiderata

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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.

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

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

28. 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).

29. 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)

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

31. 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

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

34. 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

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

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

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

39. Policies aimed at limiting price hikes Reducing taxes on food Increasing domestic food stocks Imposing export bans Expanding food subsidies Policies aimed at offsetting the costs to the poor Expanding cash-transfers Expanding school feeding programs Policy responses helped alleviate poverty impacts but may have exacerbated price increase

40. Improving our capacity to respond to commodity cycles Domestic policy agenda • Improve targeting of social welfare schemes • Invest in rural infrastructure and agricultural R&D • Be prepared to react rapidly because of long-term costs of even a relatively short bout of high food prices Global policy agenda • Proceed with trade liberalization, including improved disciplines governing export bans • Increase the financial independence of World Food Program • Improve information flows and coordination of food stocks

41. Global Economic Prospects Commodities at the crossroads Multilingual (English, French, Spanish, Chinese) Interactive forecast website (live Dec. 9) http://www.worldbank.org/GlobalOutlook