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Global Economic Prospects
Commodities at the crossroads
Uri DadushAndrew BurnsWorld 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
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
Shipping costs are plunging
0
3000
6000
9000
12000
1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07 1-Jan-08
Baltic Exchange Dry Index
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 $50; prices of metals also collapse.
Equity markets plummet... weakening exchange rates
30
45
60
75
90
105
120
135
150
165
180
1/1/2007 6/1/2007 11/1/2007 4/1/2008 9/1/2008
MSCI Equity market index ($), Jan-1 2007=100
80
90
100
110
120
130
140
01/01/2008 03/01/2008 05/01/2008 07/01/2008 09/01/2008 11/01/2008
Exchange rates, LCU/USD index Jan-01-2008 =100*
* increase implies weaker local currency
Brazilian real
…while emerging markets bond spreads widened substantially
100
200
300
400
500
600
700
800
900
1000
1100
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Sovereign bonds(EMBI Global)
Corporate bonds(CEMBI)
Basis pointsBasis pointsEmerging-market bond spreads
Jan 2007 – Nov 18, 2008
Source: JPMorganSource: JPMorgan
..and corporate bond spreads have surged
0
300
600
900
1200
1500
1800
2100
Emerging Europe
Latin America
Asia
Basis pointsBasis points
Emerging-market corporate bond (CEMBI) spreads
Source: JPMorganSource: JPMorgan
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
Financial crisis may have culminated in early October
-50
0
50
100
150
200
250
300
350
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Spread between 3-month US$ Libor and policy interest rate, basis pointsSpread between 3-month US$ Libor and policy interest rate, basis points
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
A major sustained world boom A major sustained world boom precededpreceded
-10
-5
0
5
10
Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
-75
-25
25
75
Metal Prices
Global IP
Percent change, year-on-year
Source: World Bank.
Inflation surged
0
3
6
9
12
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
High-income OECD
Developing countries
Median inflation rates: Jan 2000 to Sep 2008
Source: World Bank.
-4
-3
-2
-1
0
1
2
3
4
5
Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07
percent
U.S. policy rates left too low for too long
Real Fed Funds Target Rate (Deflated by CPI)Jan. 1991 – Sep. 2008
Source: Federal Reserve, U.S. Department of Commerce and World Bank.Source: Federal Reserve, U.S. Department of Commerce and World Bank.
U.S. fiscal surplus turned to deficit in 2001
-6
-4
-2
0
2
1990 1992 1994 1996 1998 2000 2002 2004 2006
General Government Financial Balanceshare of GDP, 1990 to 2007Percent of GDP
Source: U.S. Department of Commerce and World Bank.
U.S. Households ran up record debt as home prices surged
40
50
60
70
80
90
100
110
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
60
80
100
120
140
160
180
200
House price indexRight axis
Household Debt to GDP(%) Left axis
Household debt to GDP (%)and House price index
1980 to 2008
Percent of GDP
Source: Federal Reserve Board, RBS:Case-Schiller, World Bank.
Index, 2000=100
External Vulnerability
Source: World Bank.Source: World Bank.
Current account balance (Developing oil importers x China)
(% of GDP),
Overall budget balance(% of GDP)
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
2000 2002 2004 2006 2008
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
2000 2002 2004 2006 2008
High-income countries in recession
-4
-2
0
2
4
United States Euro Area Japan
Source: World Bank and National Agencies.
Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized
Q1 Q2 Q3
Decline in import growth affecting exports from developing countries...
-6
-1
4
9
14
1999.1m 2000.07m 2002.1m 2003.07m 2005.01m 2006.07m 2008.1m
U.S. imports
Latin American exports
Annual growth of import volumesPercentage change(12m/12m)
Source: World Bank
-3
0
3
6
9
12
15
18
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
World trade to contract in 2009 for the first since the early 1980s
Source: World Bank.
annual percent change in trade volumes
World trade volume
Developing country exports
Oil Price ForecastOil Price Forecast
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
$/barrel
Source: DEC Prospects Group.
Food price forecastFood price forecast
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Index (2000 = 100)
Source: DEC Prospects Group.
$ billions$ billions
0
200
400
600
800
1000
1990 1993 1996 1999 2002 2005 2008P
0
2
4
6
8
Net private debt and equity flows1990-2007, projected 2008-09
PercenPercentt
Percent of GDP(right axis)
Private capital flows set to decline more sharply still in 2009
Source: World Bank.
Investment in MICs to reduce sharply
-3
0
3
6
9
12
15
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Annual fixed investment growth1992 to 2007, projected 2008-2010
Percent
Source: World Bank.
-10
0
10
20
30
40
Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08
Declining Investment
Source: Haver Analytics.Source: Haver Analytics.
Indonesia
Thailand
Russia
Venezuela
Growth of real fixed investment, Q1-2006 to Q3-2008, percent yr on yr
-2
0
2
4
6
8
1981 1985 1989 1993 1997 2001 2005 2009
Sharp decline in GDP growth expectedSharp decline in GDP growth expected
High-income
Developing
Source: World Bank.
Growth of real GDP, percent
Great depression: Sui Generis
-15
-10
-5
0
5
10
15
20
1930 1941 1952 1963 1974 1985 1996 2007
US GDP, annual growth
Source: BEA
volume
Price
The (hoped for) drivers of recovery
1. Turn in the housing cycle
2. Debt work-outs
3. Greed
4. Realignment of exchange rates
5. Falling commodity prices, declining inflation and space for fiscal and monetary stimulus
6. The credibility of the state
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
0
2
4
6
8
10
12
East Asia and Pacific Europe and Central Asia South Asia
Annual GDP growth; Percent
Slowing growth across all regions
Source: World Bank.Source: World Bank.
2007
2008
201020
09
0
2
4
6
8
Middle East and North
Africa
Latin America and
Carribean
Sub-Saharan Africa
Source: World Bank.Source: World Bank.
2007
2008
201020
09
Slowing growth across all regions
Annual GDP growth; Percent
Policy Directions as illustrated by G-20
Fighting this Crisis1. Global Fiscal Stimulus2. Restraining Protectionism3. Enhanced IMF Resources
Preventing the Next One1. College of supervisors2. Managing systemic risk of CDS3. Oversight of Credit Rating Agencies4. Enhanced disclosure/common accounting
Reflecting New Realities/Enhancing Legitimacy1. G-20 or G-8?2. Developing countries in Global Stability Forum, IMF and WB
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
0
50
100
150
200
250
300
350
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
The recent boom was one of the largest, longest lasting and involved more commodities
MUV-deflated US$ (2000=100)
Source: World Bank
Agriculture
Metals
Oil
50
100
150
200
250
300
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Food
Metals and minerals
Energy
Real prices of internationally traded commodity prices in developing countries, CPI-deflated Indices, Jan. 2000=100
As with earlier booms, the slowdown in global growth has brought the boom to an end
Causes of the boom
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
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
0
1
2
3
4
5
6
1990s 2000s 2015-30
Slower population growth and lower investment rates will ease commodity demand
0
1
2
3
4
5
6
1990s 2000s 2015-30
Population
Per capita income
Source: World Bank, Linkages Model.
Growth of GDP, annual average (percent)
High-income countries Developing countries
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Energy Metals Metals (w/o China) Food
Commodity intensity of GDP, index 1971 = 1
Technological progress increases the efficiency of resource use
Source: World Bank.
Reserves of commodities reflect incentives and remain ample
0
50
100
150
200
250
300
Oil Coal Bauxite Copper
1980199020002007
Source: World Bank.
0
15
30
45
60
75
90
1970 1975 1980 1985 1990 1995 2000 2005
Offshore
Onshore
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).
2.1
1.51.2
2.3
1.7
0.0
0.5
1.0
1.5
2.0
2.5
Ag
ricu
ltu
ral
pro
du
ctiv
ity
All
fo
od
cro
ps
Cer
eals
Ed
ible
oil
s
Mea
t
Globally, agricultural productivity growth exceeds demand growth
Source: Productivity (Coelli and Rao, 2005); Food demand, FAO (2006)
Projected annual average growth rates 2000-2030, per cent
Future policy on biofuels may affect food prices
y = 2.1166x - 3.3711
R2 = 0.7527
0
50
100
150
200
250
300
350
50 100 150
Crude Oil ($/bbl)
Mai
ze P
rice
($/
ton
)
y = 0.4246x + 86.178
R2 = 0.0526
0
50
100
150
200
250
300
350
10 30 50
Crude Oil ($/bbl)
Mai
ze P
rice
($/t
on)
Source: DEC Prospects Group.
Oil < $50 Oil > $50
Source: Global Warming and Agriculture: Impact Estimates by Country William R. Cline
CGD, 2007
NotAvailable
Losses
Gains
25+ %15-25%5-15%0-5%
25+ %15-25%5-15%0-5%
Climate Impact : Agriculture 2008-2080Without Carbon Fertilization
Commodity markets: prospects and policy challenges
Recent commodity boom was more durable and larger than earlier ones but otherwise classic
While lower than in the recent past, prices are expected to remain much higher than in the 1990s – which should ensure sufficient supply to meet demand
In the right policy environment, commodity wealth can be pro-growth
Policy improvements could reduce both the likelihood of future sharp price hikes and their negative consequences
Average GDP growth rate, 1980-2006 (percent)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Non-fuel primary commodity exportersFuel exportersDiversified exporters
Commodity dependent countries tend to grow less quickly than more diversified exporters
Source: World Bank
0
10
20
30
40
50
60
70
Primary exports p.c. ('00 US$) Primary exports/exports (%)
Low income Lower middle income Upper middle income High income
Value of per capita primary commodities in exports (US$ thousands) /Share of primary commodities in total merchandise exports (%)
Commodity dependent countries tend to be poor, but commodity rich countries tend to be rich
Source: World Bank
Average volatility of export revenues, 1981-2006Standard deviation of percentage change
05
10152025303540
Export Revenues Real Exchange Rate GDP Per Capita
Fuel Exporters Non-fuel Primary Exporters Diversified Exporters
Impact of severe shocks on economic progress
Source: World Bank
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
Poverty impacts depend on actual food price increases, which varied widely across countries
-5
0
5
10
15
20
25
30
East Asia &Pacific
Europe &Central Asia
LatinAmerica &Caribbean
Middle-East& NorthAfrica
South Asia Sub-Saharan
Africa
Percent increase in real food prices, Dec. 2005 – Dec. 2007
Overall global poverty increased by 130-155 million
01234567
East Asia &Pacific
Europe &Central Asia
LatinAmerica &Caribbean
Middle-East& NorthAfrica
South Asia Sub-Saharan
Africa
Urban
Rural
Increase in poverty rate, percent of population
Policy responses helped alleviate poverty impacts but may have exacerbated price increase
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
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
Global Economic Prospects
Commodities at the crossroads
Multilingual (English, French, Spanish, Chinese)Interactive forecast website (live Dec. 9)http://www.worldbank.org/GlobalOutlook