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Historic commodity price boom ends with slowing global growth

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  • Global slump hits developing countries as credit squeeze impedes trade and growth
  • Historic commodity boom ends, prices fall with slowing growth
  • Future demand and supply of oil and food can be balanced, given the right policies

December 9, 2008—A new World Bank report, Global Economic Prospects 2009, examines the impact of the financial crisis on GDP growth across the world, noting a marked slowdown everywhere, including in formerly resilient developing countries. Subtitled Commodities at the Crossroads, the report finds that future demand and supply of key commodities like oil and food can be balanced given the right policies in the energy and agriculture sectors.

Global slump hits developing world

In its global economic outlook section, the report predicts that global GDP growth will slip from 2.5 percent in 2008 to 0.9 percent in 2009. Developing country growth is expected to decline from a resilient 7.9 percent in 2007 to 4.5 percent in 2009. Growth in rich countries next year will likely be negative.

We see that the global economy is transitioning from a long period of strong growth led by developing countries to one of great uncertainty as the ongoing financial crisis has shaken markets worldwide,” said Hans Timmer, Manager, Global Trends, in the World Bank’s Development Prospects Group. “The slowdown in developing countries is very significant because the credit squeeze directly hits investments, which were a key pillar supporting the strong performance of the developing world during the past 5 years.”

With tighter credit conditions and less appetite for risk, investment growth in the developing world is projected to fall from 13 percent in the 2007 to 3.5 percent in 2009, deeply significant because a third of GDP growth can be attributed to it.

Timmer and other economists at the World Bank project that world trade will contract by 2.1 percent in 2009. This is the first time since 1982 that world trade will shrink. All countries will be affected by this drop in exports, which reflects not only the sharp slowdown in global demand, but also the reduced availability of export credits.

Outlook for developing regions

In East Asia and the Pacific, GDP growth slowed to an estimated 8.5 percent in 2008 and is expected to drop to 6.7 percent in 2009. The region has been hit by a heavy sell-off of equities and sharp downturns in export volumes. China’s growth is projected to slow from 9.4 percent in 2008 to 7.5 percent in 2009, but the government’s recently announced $586 billion stimulus program may edge China’s growth back to 8.5 percent in 2010.

GDP growth in Europe and Central Asia is expected to slow to 5.3 percent in 2008, falling to 2.7 percent in 2009. The downturn is being driven by lower investment tied to difficult financing conditions and weaker export market demand. Russia’s growth will likely be 6 percent in 2008, down from 8.1 percent in 2007, as the banking crisis and low oil prices remain in play.

In Latin America and the Caribbean, GDP growth—expected to be 4.4 percent in 2008—is at risk, pressuring private sector investment. As commodity prices weaken, major exporters like Argentina may record current account deficits. Others like Brazil and Mexico will see a drop in exports to the recession-hit United States and Europe. The regional outlook is expected to worsen in 2009, with GDP dropping to 2.1 percent, driven by a decline in capital spending.

The Middle East and North Africa region appears to have held up well in 2008, growing at an unchanged 5.8 percent in 2008, but the aggregate number hides substantial swings in trade, current account positions and external financing requirements. With oil exporters facing diminished revenues in 2009, regional growth is expected to be just 3.9 percent in 2009.

Growth in South Asia eased to 6.3 percent in 2008 from 8.4 percent in 2007 and is expected to slip to 5.4 percent in 2009. High food and fuel prices, tighter credit conditions, and weaker foreign demand have led to worsening external accounts and slower investment growth. The downturn is most apparent in India and Pakistan, where industrial production fell sharply.

In Sub-Saharan Africa, growth expanded to 5.4 percent in 2008, and is expected to ease to 4.6 percent in 2009. But the contribution of net exports to African GDP growth may fall, and many countries are exposed to terms-of-trade shocks. Higher food and fuel prices have also widened the poverty gap, raising the risk of social unrest. 
 
The report’s complete projections can be found on a companion website, Prospects for the Global Economy, which is available in English, Chinese, French, and Spanish.

Commodities at the crossroads

Recent sharp declines in oil and food prices mark the end of what has been the most historic commodity price boom of the past century. Like earlier booms, this one was driven by strong global economic growth and has come to an end with the abrupt slowdown in the global economy precipitated by the financial crisis.

The exceptional duration of this five-year commodity boom, the number of commodities involved, and the heights that prices reached reflect the resilience of developing country growth during this period.

Between early 2003 and mid-2008, oil prices climbed by 320 percent in dollar terms, and internationally traded food prices by 138 percent. But the prolonged boom is clearly over, even as the social and human consequences of historic high prices linger. Prices across the board have fallen, giving up much of their earlier gains, due to slower GDP growth, increased supplies, and revised expectations.

However, they still remain a lot higher than they were at the start of the boom and are expected to remain higher than during the 1990s over the next 20 years, owing to biofuel-driven demand for food grains. Oil prices are likely to average about $75 a barrel next year and, for the next five years, real food prices worldwide are expected to remain about 25 percent higher than they were in the 1990s.

Long-term demand and supply prospects for oil, metals and food

Despite the fall in commodity prices, concerns persist about long-term demand and supply, and about the impact of high commodity prices on poor people. The report’s authors examine whether the world might be heading into a prolonged period of insufficiency, with—as some fear—dwindling supplies of oil, metals, and food grains, and ever-increasing prices. They also look at how poor people are affected and how best they can be helped.

We find that speculation about looming shortages of food and energy are not well founded, and that the world won’t run out of key commodities given the right policies,” said Andrew Burns, lead author of the report, “How things actually play out over the next 20 years depends on governments taking steps to reduce oil dependence, promote alternative energy, combat climate change, and boost farm productivity.

Why won’t commodities quickly grow scarce? The world economy is entering a phase of slower growth, due to slower population growth, ageing in high-income countries and slower growth in some large fast-growing developing countries as income levels catch up. Also, technological progress has reduced the energy and food resources used per unit of GDP. China’s metal demand—which accounts for a global rise in metal intensity—is expected to stabilize, then decline in step with the rest of the world.

Demand in developing countries for new cars and trucks is likely to drive 75 percent of additional energy needs between now and 2030, so efficiency gains in transport are critical. These gains potentially include hybrid, electric, and hydrogen-powered cars.

With slowing population growth, the world is unlikely to run out of food. But supply might not keep pace with demand in some countries with fast growing populations, especially in Africa. These countries need to boost domestic agricultural productivity by improving rural road networks and increasing agricultural research and development.

Climate change could cause agricultural productivity to decline by as much as 25 percent by 2080 if nothing is done,” said Burns, “There is no reason for complacency and lots of room for policy action, including supporting improved technologies.”

Food prices will likely continue to be more sensitive to oil prices as a result of increased biofuel production from food crops. However, new technologies such as non-grain-based biofuels and other energy alternatives could make grain-based biofuels uneconomical.

Commodity exports and economic growth

Another key finding from the report is that commodity exports can promote growth given the right policies. In particular, the report notes that although resource-dependent countries tend to grow slowly, resource-rich countries tend to be high-income countries.

The report concludes that rather than commodity dependence causing slow growth and poverty, it is slow growth – the failure to develop the non-commodity sectors of an economy – that explains commodity dependence.

Resource-rich countries have managed their recent windfall revenues more prudently than in the past, and so are better prepared for the current decline in prices. But countries with new-found resources and those heavily reliant on bank lending may be at risk.

Impact of high commodity prices on poverty

Finally, the report notes that high commodity prices—particularly of food—have had a profound impact on poverty, pushing 130 to 155 million people below the poverty line just between December 2005 and December 2007. The worst impact was in urban areas. While government policies reacted swiftly to offset the worst effects of the higher prices, many of these efforts were poorly targeted and expensive.

Looking forward, social assistance programs need to be better targeted so that the next time these programs are scaled up during a crisis, a much larger share of the aid reaches those most in need.” concluded Burns. “Action is also needed at the global level to discourage export bans of food grains, strengthen agencies like the World Food Programme, and improve information about and coordination of existing domestic grain reserves.”

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