Global economy: No surprises

The global economy faces deflationary pressures as the vast credit expansion of the last 4 decades comes to an end.

$60 Trillion Global Credit

Commodity prices test their 2009 lows. Breach of support at 100 on the Dow Jones UBS Commodity Index would warn of further price falls.

Dow Jones UBS Commodity Index

The dramatic fall in bulk commodity prices confirms the end of China’s massive infrastructure boom.

Bulk Commodity Prices

Crude oil, through a combination of increased production and slack demand has fallen to around $60/barrel.

Crude Oil

Falling prices have had a sharp impact on global Resources and Energy stocks….

DJ Global Energy

But in the longer term, will act as a stimulus to the global economy. Already we can see an up-turn in the Harpex index of container vessel shipping rates, signaling an increase in international trade in finished goods.


The latest OECD export statistics show who the likely beneficiaries will be. Primary producers like Brazil and Russia have suffered the most, while finished goods manufacturers like China and the European Union display growth in exports. The US experienced a drop in the first quarter of 2015, but should rebound provided the Dollar does not strengthen further.

OECD Exports

Australia and Japan offer a similar contrast.

OECD Exports

Oil-rich Norway (-5.8%,-13.3%) has also been hard hit. Primary producers are only likely to recover much later in the economic cycle.

8 thoughts on “Global economy: No surprises

  1. grahamdcox says:

    The pattern, but more importantly scale of all the commodity price charts is changed significantly. Using dollar commodity price charts for all economics article is a widespread unthinking bad habit.

    International economics article should use charts adjusted for the $ numeraire so the demand and supply changes are not polluted by movements in the numeraire currency and local national charts should have the chart in local currency.

  2. grahamdcox says:

    Those commodity price charts should be used with two huge health warnings!

    1) The charts is not corrected for the effective rate of the US dollar..
    2) The charts are not corrected for the rate of change of growth in production of the sectors in China that most use those commodities.

    Graham Cox

    • ColinTwiggs says:

      Adjust for CPI and demand from China?

      • grahamdcox says:

        Hi Colin,

        1) The ‘Numeraire Correction’.

        Any internationally traded product has a numeraire: usually the US dollar. Unless one corrects for the rise and fall of the dollar via-a-vis the f other currencies in the world, the price series will be horribly biased/faulty; unless the numeraire happens to be a very steady currency. The US dollar is not a steady currency. I will term this the ‘numeraire correction’ .The correct way to do make this correction is to give a weight to the USA
        ( eg related to the share of US GDP in world GDP) of X% and then adjust the commodity price by (100-X)% of the movements in the effective/trade weighted US dollar. The latter is called, in the vernacular, the ‘dollar index’ and is traded . The series is freely available and the major central banks calculate their own and have them freely available in their statistics databases .

        Of course the dollar price of commodities is important for those who trade in them, but if the price series is being used for macro analysis, then the adjustment above must be made.

        2) The China Bias

        ……..more correctly, emerging successful exporting former communist countries; but in practice this means China

        Correction 1 above always applies, but this second bias to be corrected for in analysis is a once in a lifetime, in effect, exogenous influence which must be made to reflect the fairly rapid emergence of huge demand for commodities from China as they integrated into the world economy and undertook a (centrally planned) massive building of new production facilities and infrastructure and then the slowed down when sated . This was a mega investment accelerator which I will term the ‘infrastructure accelerator’. In the context of inelastic commodity supply capabilities/responses around the world, the commodity price surge caused by this infrastructure accelerator should not have warranted a world -wide interest rate response for it was not a monetary phenomenon . Ditto, when China takes its foot off the ‘infrastructure accelerator’, that should not be grounds for an interest rate response from the monetary authorities in the other direction: just as shale oil and gas emergence is not.

        I am not saying one can easily arithmetically make an adjustment for this in the commodity prices series: though it is relatively simple in a multiple regression. Rather, when having a monetary policy discussion, the numeraire correction adjusted commodity prices indices should be considered first in the context of the China infrastructure accelerator wave before macro conclusions are drawn.

        Graham D Cox.

      • ColinTwiggs says:

        The major components of the Dollar Index are the Euro and the Yen. Both are undergoing extensive QE and are far less stable (in terms of purchasing power) than the Dollar. I would suggest they are weakening rather than the dollar strengthening.
        The surge in commodity prices caused by China’s infrastructure boom is over. The commodity graphs are intended to illustrate, not ignore, this.
        Low commodity prices favor manufacturing economies like China, Japan and the EU, who import a lot of their resources. Resource-centered economies like Brazil, Russia, Australia and Norway will suffer.

      • grahamdcox says:

        My comments were primarily related to macro decision-making.

        But you are off beam on the numeraire unless a country you are looking at buys all its imports from the USA. Also whether a country is embarking on QE is entirely irrelevant.

        For example, the dollar is strong, but Australia can buy imports more cheaply than before from say Japan because of currency movements. hence looking at an un-adjusted dollar commodity index is somewhat barmy and would get a fail in an economics exam.

        Re infrastucture, you only refer to the ramp-up and it effects but ignore the effects of the (one-off) slowdown in the groth rateof their infrastructural spending. The downward pressure from this will not be long lasting ( the growth rate will stabilise). It is not a new norm just as the ram-up was not. .

      • ColinTwiggs says:

        “My comments were primarily related to macro decision-making.”

        I still don’t see how this is relevant to the post.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s