Came across this piece :
Two worrying trends have emerged on the global scene. One is a crash in commodity prices. The other is an imminent rise in global interest rates.
Historically, crashing commodity prices and rising interest rates have often combined to create a global recession. Commodity prices have plunged 20% in the last six months. If this reflects a surge in global production after years of insufficient output, that can be a good trend that satisfies demand, lowers input prices for manufacturers, raises profits and tames inflation.
However, falling commodity prices can also signal a coming recession.
They may indicate an economic slowdown for reasons poorly understood by policymakers, and so not countered. The current commodity crash is definitely linked to an unexpected slowing of global growth. China, Japan and Europe are growing more slowly than expected at the start of the year. Chinese growth might actually dip below 7%, half its peak rate in the 2000s.
Hence, the IMF is revising its global growth projections (in PPP terms) for 2014 down from 3.6% to 3.1%.
Note that a fall below 3% is widely accepted as a sign of recession.
Latin America, Russia and Africa grew fast between 2003 and 2010. As commodity producers, they benefited from the huge surge in Chinese demand.
Today, they are all feeling the heat of China’s slowdown. Brazil, Russia and South Africa all face the danger of zero or negative growth.
World food prices used to be depressed by the dumping of surpluses by Western nations. But after 2005, food prices skyrocketed. Bad harvests coincided with the huge diversion of agricultural land to producing biofuels: ethanol from maize and synthetic diesel from vegetable oils. Back in 2005, the Chicago market price of maize was $2 a bushel and of wheat was $3 a bushel. After 2008, wheat prices briefly went into double digits and maize reached $8 a bushel.
However, prices have since trended down, and after ups and downs, they have suddenly fallen steeply since May 2014. Maize is now down to just $3.25 a bushel and wheat to $4.75 a bushel. World cereal production this year is estimated to be 20% more than demand, so the surplus will keep prices down for some time to come. Soybeans and cotton are down one-third from their rates a couple of years ago. Edible oil prices have crashed.
Oil was just $25 a barrel in 2003 but soared to almost $148 in 2008. In recent times, the price of Brent crude has been around $110 a barrel. But this has now fallen to $96 a barrel, despite troubles in Ukraine and West Asia that would normally have sent prices spiralling. Iron ore has halved from a peak of $180 a tonne. Coal and metals are down to their lowest levels for five years.
The second source of worry is the coming rise of interest rates in rich countries.
The US has for years indulged in quantitative easing, unleashing trillions of dollars on the world economy.
This has created froth, if not actual bubbles, in all asset markets.
The Eurozone looks like getting into quantitative easing, and Japan is neck-deep in it too. The tidal wave of cheap currency from rich countries has boosted property and stock prices globally, including in emerging markets.
But the US is about to end quantitative easing next month, and will start raising interest rates next year. Maybe the rich countries will sense the danger, and ease money again to stave off a recession. Yet, as former adviser to Ronald Reagan, David Stockman, puts it, the trillions pumped by central banks of rich countries into the global economy have created asset bubbles that have to burst some time.
Discuss!!