Transcript World Bank.

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
 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
12000
Baltic Exchange Dry Index
9000
6000
3000
0
1-Jan-03
1-Jan-04
1-Jan-05
1-Jan-06
1-Jan-07
1-Jan-08
A massive, global, crisis
 World output growth down from +3.5% in 20062007 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 $50; prices of metals also collapse.
Equity markets plummet... weakening
exchange rates
MSCI Equity market index ($), Jan-1 2007=100
Exchange rates, LCU/USD index Jan-01-2008 =100*
140
180
* increase implies weaker local currency
165
Brazilian real
130
150
135
120
120
105
110
90
100
75
60
90
45
30
1/1/2007
6/1/2007
11/1/2007
4/1/2008
9/1/2008
80
01/01/2008
03/01/2008
05/01/2008
07/01/2008
09/01/2008
11/01/2008
…while emerging markets bond spreads
widened substantially
Basis points
Emerging-market bond spreads
Jan 2007 – Nov 18, 2008
1100
1000
Corporate bonds
(CEMBI)
900
800
700
600
500
400
300
Sovereign bonds
(EMBI Global)
200
Source: JPMorgan
100
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
..and corporate bond spreads have
surged
Emerging-market corporate bond (CEMBI) spreads
Basis points
2100
Emerging
Europe
1800
1500
1200
900
Latin America
600
300
Asia
Ja
n07
M
ar
-0
7
M
ay
-0
7
Ju
l-0
7
S
ep
-0
7
N
ov
-0
7
Ja
n08
M
ar
-0
8
M
ay
-0
8
Ju
l-0
8
S
ep
-0
8
N
ov
-0
8
0
Source: 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
Spread between 3-month US$ Libor and policy interest rate, basis points
350
300
250
200
150
100
50
0
-50
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
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
preceded
Percent change, year-on-year
Global IP
10
75
5
25
0
-25
Metal Prices
-5
-10
Jan-91
-75
Jan-93
Jan-95
Source: World Bank.
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Inflation surged
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
U.S. policy rates left too low for too long
percent
Real Fed Funds Target Rate (Deflated by CPI)
Jan. 1991 – Sep. 2008
5
4
3
2
1
0
-1
-2
-3
-4
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Source: Federal Reserve, U.S. Department of Commerce and World Bank.
Jan-07
U.S. fiscal surplus turned to deficit in 2001
General Government Financial Balance
share of GDP, 1990 to 2007
Percent of GDP
2
0
-2
-4
-6
1990
1992
1994
1996
1998
2000
2002
Source: U.S. Department of Commerce and World Bank.
2004
2006
U.S. Households ran up record debt
as home prices surged
Household debt to GDP (%)
and House price index
1980 to 2008
Percent of
GDP
110
Index,
2000=100
200
100
180
Household Debt to GDP(%)
Left axis
90
160
80
140
70
120
60
100
50
House price index
Right axis
40
80
60
1980
1983
1986
1989
1992
1995
1998
2001
2004
Source: Federal Reserve Board, RBS:Case-Schiller, World Bank.
2007
External Vulnerability
0
Current account balance
(Developing oil importers 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
High-income countries in 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
Decline in import growth affecting
exports from developing countries...
Percentage change
(12m/12m)
Annual growth of import volumes
U.S. imports
14
9
4
-1
Latin American exports
-6
1999.1m
2000.07m
Source: World Bank
2002.1m
2003.07m
2005.01m
2006.07m
2008.1m
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
Oil Price Forecast
$/barrel
120
100
80
60
40
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: DEC Prospects Group.
Food price forecast
Index (2000 = 100)
300
250
200
150
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
50
Source: DEC Prospects Group.
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
Investment in MICs to reduce sharply
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
Declining Investment
40
Growth of real fixed investment, Q1-2006 to Q3-2008, percent yr on yr
Venezuela
30
Russia
20
Thailand
10
Indonesia
0
-10
Q1-06
Q3-06
Source: Haver Analytics.
Q1-07
Q3-07
Q1-08
Q3-08
Sharp decline in GDP growth expected
Growth of real GDP, percent
Developing
8
6
4
2
0
High-income
-2
1981
1985
Source: World Bank.
1989
1993
1997
2001
2005
2009
Great depression: Sui Generis
20
US GDP, annual growth
15
Price
10
5
0
-5
volume
-10
-15
1930
1941
1952
1963
Source: BEA
1974
1985
1996
2007
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
Slowing growth across all regions
Annual GDP growth; Percent
12
2010
6
2009
8
2008
2007
10
4
2
0
East Asia and Pacific
Source: World Bank.
Europe and Central Asia
South Asia
Slowing growth across all regions
Annual GDP growth; Percent
2010
2009
6
2008
2007
8
4
2
0
Middle East and North
Latin America and
Africa
Carribean
Source: World Bank.
Sub-Saharan Africa
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
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