Transcript Source: World Bank.

Global Economic Prospects
Commodities at the crossroads
Andrew Burns
World Bank
Paris, Dec. 8, 2009
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
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.
High-income OECD countries falling into
potentially deep synchronous recession
4
Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized
2
0
Q1
Q2
Q3
-2
-4
United States
Euro Area
Source: World Bank and National Agencies.
Japan
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
Output in emerging markets also slowing
sharply
30
20
Industrial production,
annualized percent change, 3m/3m
Developing excl. China
China
10
0
High-income OECD
-10
2006M1 2006M5 2006M9 2007M1 2007M5 2007M9 2008M1 2008M5 2008M9
Source: World Bank
Crisis has sharply tightened credit
conditions in developing countries
Emerging-market bond spreads
Basis points
1100
1000
Corporate bonds
(CEMBI)
900
800
700
600
500
400
300
Sovereign bonds
(EMBI Global)
200
100
Jan-07
Apr-07
Source: JPMorgan
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
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
35
Bank lending
30
25
20
Equity issuance
15
10
5
Bond issuance
0
2004M1
2005M1
Source: World Bank.
2006M1
2007M1
2008M1
Private capital flows set to decline more
sharply still in 2009
$ billions
Percent
Net private debt and equity flows
1990-2007, projected 2008-09
8
1000
800
Percent of GDP
(right axis)
6
600
4
400
2
200
0
0
1990
1993
Source: World Bank.
1996
1999
2002
2005
2008P
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
For middle income countries tight credit
conditions are expected to cut sharply into
investment spending in 2009
Percent
Annual fixed investment growth
15
1992 to 2007, projected 2008-2010
12
9
6
3
0
-3
1992
1994
1996
Source: World Bank.
1998
2000
2002
2004
2006
2008
2010
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.
10.0
5.0
0.0
-5.0
-10.0
1995
 Slower gains in worker
remittances and tourism
amidst OECD recession
carry negative effects; fears
of shortfall in aid are
widespread.
1998
2001
2004
2007
2010
Projected growth in remittance flows
50
South Asia
Africa
40
30
20
10
0
2007
Source: World Bank.
2008
2009
2010
Sharp decline in GDP growth expected
Growth of real GDP, percent
8
Developing
6
4
2
0
High-income
-2
1981
1985
Source: World Bank.
1989
1993
1997
2001
2005
2009
World trade to contract in 2009 for the first
since the early 1980s
annual percent change in trade volumes
18
Developing country exports
15
12
9
6
3
0
World trade volume
-3
1981
1984
1987
Source: World Bank.
1990
1993
1996
1999
2002
2005
2008
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
Food and fuel shock has left developing
countries more vulnerable (1)
Median inflation rates: Jan 2000 to Sep 2008
12
Developing countries
9
6
3
High-income OECD
0
Jan-00
Jan-01
Jan-02
Source: World Bank.
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Food and fuel shock has left developing
countries more vulnerable (2)
0
Current account balance
(Developing oil exporters - x China)
(% of GDP)
,
-0.5
Overall budget balance
(% of GDP)
0.5
0.0
-1
-0.5
-1.5
-2
-1.0
-2.5
-1.5
-3
-3.5
-2.0
-4
-2.5
-4.5
-5
-3.0
2000
2002
2004
2006
2008
2000
Source: World Bank.
2002
2004
2006
2008
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
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
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
The recent boom was one of the largest,
longest lasting and involved more commodities
MUV-deflated US$ (2000=100)
350
300
Agriculture
250
200
Metals
150
100
50
Oil
0
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Source: World Bank
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
300
Energy
250
200
150
100
Food
Metals and
minerals
50
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
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
Slower population growth and lower
investment rates will ease commodity demand
Growth of GDP, annual average (percent)
6
High-income countries
6
Developing countries
5
5
Population
Per capita income
4
4
3
3
2
2
1
1
0
0
1990s
2000s
2015-30
Source: World Bank, Linkages Model.
1990s
2000s
2015-30
Technological progress increases the
efficiency of resource use
Commodity intensity of GDP, index 1971 = 1
1.10
1.05
1.00
0.95
0.90
0.85
0.80
0.75
0.70
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Energy
Source: World Bank.
Metals
Metals (w/o China)
Food
Reserves of commodities reflect
incentives and remain ample
300
1980
1990
2000
2007
250
200
150
100
50
0
Oil
Source: World Bank.
Coal
Bauxite
Copper
Higher prices should provide the incentives
to continue ensuring additional supply from
non-traditional sources
Global oil production, millions of barrels per day
90
Offshore
Onshore
75
60
45
30
15
0
1970
1975
1980
Source: Sandrea and Sandrea (2007).
1985
1990
1995
2000
2005
Globally, agricultural productivity growth
exceeds demand growth
Projected annual average growth rates 2000-2030, per cent
2.5
2.3
2.1
2.0
1.7
1.5
1.5
1.2
1.0
Source: Productivity (Coelli and Rao, 2005); Food demand, FAO (2006)
Meat
Edible oils
Cereals
Agricultural
productivity
0.0
All food
crops
0.5
Future policy on biofuels may affect
food prices
Oil < $50
Oil > $50
350
350
300
2
R = 0.0526
Maize Price ($/ton)
Maize Price ($/ton)
y = 2.1166x - 3.3711
y = 0.4246x + 86.178
300
250
200
150
100
250
200
150
100
50
50
0
0
10
30
Crude Oil ($/bbl)
Source: DEC Prospects Group.
50
R2 = 0.7527
50
100
Crude Oil ($/bbl)
150
Climate Impact : Agriculture 2008-2080
Without Carbon Fertilization
Losses
25+ %
15-25%
5-15%
0-5%
Gains
25+ %
15-25%
5-15%
0-5%
Not
Available
Source: Global Warming and Agriculture:
Impact Estimates by Country
William R. Cline
CGD, 2007
Commodity markets: prospects and
policy challenges
 Recent commodity boom was more durable and
larger than earlier ones but otherwise classic
 While lower than in the recent past, prices are
expected to remain much higher than in the 1990s –
which should ensure sufficient supply to meet
demand
 In the right policy environment, commodity wealth
can be pro-growth
 Policy improvements could reduce both the
likelihood of future sharp price hikes and their
negative consequences
Commodity dependent countries tend to grow
less quickly than more diversified exporters
Average GDP growth rate, 1980-2006 (percent)
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Non-fuel primary commodity exporters
Fuel exporters
Diversified exporters
Source: World Bank
Commodity dependent countries tend to be poor,
but commodity rich countries tend to be rich
Value of per capita primary commodities in exports (US$ thousands) /
Share of primary commodities in total merchandise exports (%)
70
60
50
40
30
20
10
0
Primary exports p.c. ('00 US$)
Low income
Source: World Bank
Lower middle income
Primary exports/exports (%)
Upper middle income
High income
Impact of severe shocks on economic progress
Average volatility of export revenues, 1981-2006
Standard deviation of percentage change
40
35
30
25
20
15
10
5
0
Export Revenues
Fuel Exporters
Source: World Bank
Real Exchange Rate
Non-fuel Primary Exporters
GDP Per Capita
Diversified Exporters
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
Percent increase in real food prices, Dec. 2005 – Dec. 2007
30
25
20
15
10
5
0
-5
East Asia & Europe &
Pacific
Central Asia
Latin
America &
Caribbean
Middle-East South Asia
& North
Africa
SubSaharan
Africa
Overall global poverty increased by 130155 million
Increase in poverty rate, percent of population
7
6
5
4
3
2
1
0
Urban
Rural
East Asia & Europe &
Pacific
Central Asia
Latin
America &
Caribbean
Middle-East South Asia
& North
Africa
SubSaharan
Africa
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