CHAPTER 2 Outlook for Global Growth and Commodity Prices
- Stefania Fabrizio
- Published Date:
- March 2010
The world economy is beginning to pull out of the deepest slump since the Great Depression, but stabilization is uneven and the recovery remains fragile. Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and signs of tentative recovery are mounting. After collapsing in the second half of 2008, commodity prices have stabilized—their future path depends importantly on the timing and strength of the global recovery.
After several quarters of declining economic activity, high-frequency data point to a return to modest growth at the global level. Signs of rebounding growth are most widespread in emerging Asia, while there are also indications that activity is starting to turn around in the United States and western Europe.
For this year, global growth is projected to contract by 1.1 percent, before expanding by about 3.1 percent in 2010 (Figure 2.1). Recovery will be sluggish, however, particularly in the advanced economies, as problems in the financial sector and balance sheet adjustment continue to weigh on spending. With growth remaining subpar, unemployment is likely to continue to rise well into 2010. Wide output gaps should ensure that inflation pressures remain subdued.
Figure 2.1.Real Gross Domestic Product
Sources: Fund staff projections, and Global Data Source.
Activity in the advanced economies is projected to decline by 3.4 percent in 2009, followed by a modest rebound in 2010, as deleveraging, limited credit growth, and rising unemployment continue to bear upon domestic demand. Although projections for 2010 have been revised upward, consistent with the recent uptick in momentum, growth is still expected to fall short of potential until late in the year, implying continuing increases in unemployment.
Emerging and developing economies are projected to regain growth momentum during the second half of 2009. Growth in emerging and developing economies is projected at 1.7 percent in 2009, before rebounding to about 5 percent in 2010, albeit with notable regional differences (Figure 2.2).
Figure 2.2.Growth in Emerging and Developing Countries, 2009–10
Source: Fund staff projections.
Inflation pressures have remained subdued with the continued weakness of the global economy, notwithstanding the recent uptick in commodity prices. Year-on-year world inflation moderated to 1.3 percent in August, down from about 6 percent one year earlier. In the advanced economies, headline inflation turned negative in May (and continued to be so until August) as oil prices remained far below levels one year earlier, despite their recent pickup. Similarly, headline and core inflation in the emerging markets have moderated. Risks for sustained deflation are small, as inflation expectations in most major economies hover in the 1–2 percent range.
After collapsing in the second half of 2008, commodity prices broadly stabilized in the first quarter of 2009 and subsequently staged a strong rally in the second quarter, possibly reflecting perceptions of an impending turnaround in global economic activity. However, the magnitude of price increases varied considerably across commodities, reflecting differences in cyclical sensitivity of commodities and commodity-specific factors (Figure 2.3). Oil prices responded strongly to perceptions that the worst of the global recession was over and to signs of a demand rebound in China. Supply retrenchment, particularly OPEC production cuts, has also bolstered oil prices. Most metal prices rebounded in the second quarter of 2009, reflecting not only the improved macroeconomic/financial outlook, but also cyclical supply retrenchment and China’s restocking associated with its fiscal stimulus package. Food prices also enjoyed a broad-based and modest recovery in the spring. More recently, however, commodity-specific fundamentals—including weather conditions and expanded acreage in some major crop producers—have led to a wide divergence in price changes across the major global crops.
Figure 2.3.Daily Commodity Price Indices
Sources: Bloomberg, and Fund staff calculations.
Looking forward, the near-term outlook for commodities depends significantly on the timing and strength of the global recovery. Compared with earlier recoveries, commodity demand prospects will now depend more on activity in emerging and developing economies, given the steady increase in their market shares. However, a good part of the recovery appears already priced into oil and metal prices. For food commodities, prices are not expected to rise through the global economic recovery due to their relatively low sensitivity to the business cycle, although the higher cost of energy and increased biofuel usage could pose upward price risks in the longer run (see Figure 2.4).
Figure 2.4.Selected Commodity Prices
Source: Fund staff projections.