Global Economic Prospects Commodities at the crossroads Uri Dadush Andrew Burns World Bank Brussels, Dec. 9, 2009

Global Economic Prospects

Commodities at the crossroads

Uri DadushAndrew BurnsWorld 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

0

3000

6000

9000

12000

1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07 1-Jan-08

Baltic Exchange Dry Index

A massive, global, crisis

World output growth down from +3.5% in 2006-2007 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

30

45

60

75

90

105

120

135

150

165

180

1/1/2007 6/1/2007 11/1/2007 4/1/2008 9/1/2008

MSCI Equity market index ($), Jan-1 2007=100

80

90

100

110

120

130

140

01/01/2008 03/01/2008 05/01/2008 07/01/2008 09/01/2008 11/01/2008

Exchange rates, LCU/USD index Jan-01-2008 =100*

* increase implies weaker local currency

Brazilian real

…while emerging markets bond spreads widened substantially

100

200

300

400

500

600

700

800

900

1000

1100

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Sovereign bonds(EMBI Global)

Corporate bonds(CEMBI)

Basis pointsBasis pointsEmerging-market bond spreads

Jan 2007 – Nov 18, 2008

Source: JPMorganSource: JPMorgan

..and corporate bond spreads have surged

0

300

600

900

1200

1500

1800

2100

Emerging Europe

Latin America

Asia

Basis pointsBasis points

Emerging-market corporate bond (CEMBI) spreads

Source: JPMorganSource: 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

-50

0

50

100

150

200

250

300

350

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Spread between 3-month US$ Libor and policy interest rate, basis pointsSpread between 3-month US$ Libor and policy interest rate, basis points

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 A major sustained world boom precededpreceded

-10

-5

0

5

10

Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

-75

-25

25

75

Metal Prices

Global IP

Percent change, year-on-year

Source: World Bank.

Inflation surged

0

3

6

9

12

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

High-income OECD

Developing countries

Median inflation rates: Jan 2000 to Sep 2008

Source: World Bank.

-4

-3

-2

-1

0

1

2

3

4

5


percent

U.S. policy rates left too low for too long

Real Fed Funds Target Rate (Deflated by CPI)Jan. 1991 – Sep. 2008

Source: Federal Reserve, U.S. Department of Commerce and World Bank.Source: Federal Reserve, U.S. Department of Commerce and World Bank.

U.S. fiscal surplus turned to deficit in 2001

-6

-4

-2

0

2

1990 1992 1994 1996 1998 2000 2002 2004 2006

General Government Financial Balanceshare of GDP, 1990 to 2007Percent of GDP

Source: U.S. Department of Commerce and World Bank.

U.S. Households ran up record debt as home prices surged

40

50

60

70

80

90

100

110

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

60

80

100

120

140

160

180

200

House price indexRight axis

Household Debt to GDP(%) Left axis

Household debt to GDP (%)and House price index

1980 to 2008

Percent of GDP

Source: Federal Reserve Board, RBS:Case-Schiller, World Bank.

Index, 2000=100

External Vulnerability

Source: World Bank.Source: World Bank.

Current account balance (Developing oil importers x China)

(% of GDP),

Overall budget balance(% of GDP)

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2000 2002 2004 2006 2008

-5

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

2000 2002 2004 2006 2008

High-income countries in recession

-4

-2

0

2

4

United States Euro Area Japan

Source: World Bank and National Agencies.

Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized

Q1 Q2 Q3

Decline in import growth affecting exports from developing countries...

-6

-1

4

9

14

1999.1m 2000.07m 2002.1m 2003.07m 2005.01m 2006.07m 2008.1m

U.S. imports

Latin American exports

Annual growth of import volumesPercentage change(12m/12m)

Source: World Bank

-3

0

3

6

9

12

15

18

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

World trade to contract in 2009 for the first since the early 1980s

Source: World Bank.

annual percent change in trade volumes

World trade volume

Developing country exports

Oil Price ForecastOil Price Forecast

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$/barrel

Source: DEC Prospects Group.

Food price forecastFood price forecast

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Index (2000 = 100)


$ billions$ billions

0

200

400

600

800

1000

1990 1993 1996 1999 2002 2005 2008P

0

2

4

6

8

Net private debt and equity flows1990-2007, projected 2008-09

PercenPercentt

Percent of GDP(right axis)

Private capital flows set to decline more sharply still in 2009

Source: World Bank.

Investment in MICs to reduce sharply

-3

0

3

6

9

12

15

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Annual fixed investment growth1992 to 2007, projected 2008-2010

Percent

Source: World Bank.

-10

0

10

20

30

40

Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08

Declining Investment

Source: Haver Analytics.Source: Haver Analytics.

Indonesia

Thailand

Russia

Venezuela

Growth of real fixed investment, Q1-2006 to Q3-2008, percent yr on yr

-2

0

2

4

6

8

1981 1985 1989 1993 1997 2001 2005 2009

Sharp decline in GDP growth expectedSharp decline in GDP growth expected

High-income

Developing

Source: World Bank.

Growth of real GDP, percent

Great depression: Sui Generis

-15

-10

-5

0

5

10

15

20

1930 1941 1952 1963 1974 1985 1996 2007

US GDP, annual growth

Source: BEA

volume

Price

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

0

2

4

6

8

10

12

East Asia and Pacific Europe and Central Asia South Asia

Annual GDP growth; Percent

Slowing growth across all regions


2007

2008

201020

09

0

2

4

6

8

Middle East and North

Africa

Latin America and

Carribean

Sub-Saharan Africa


2007

2008

201020

09

Slowing growth across all regions

Annual GDP growth; Percent

Policy Directions as illustrated by G-20

Fighting this Crisis1. Global Fiscal Stimulus2. Restraining Protectionism3. Enhanced IMF Resources

Preventing the Next One1. College of supervisors2. Managing systemic risk of CDS3. Oversight of Credit Rating Agencies4. Enhanced disclosure/common accounting

Reflecting New Realities/Enhancing Legitimacy1. 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

0

50

100

150

200

250

300

350

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

The recent boom was one of the largest, longest lasting and involved more commodities

MUV-deflated US$ (2000=100)

Source: World Bank

Agriculture

Metals

Oil

50

100

150

200

250

300


Food

Metals and minerals

Energy

Real prices of internationally traded commodity prices in developing countries, CPI-deflated Indices, Jan. 2000=100

As with earlier booms, the slowdown in global growth has brought the boom to an end

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






0

1

2

3

4

5

6

1990s 2000s 2015-30

Slower population growth and lower investment rates will ease commodity demand

0

1

2

3

4

5

6

1990s 2000s 2015-30

Population

Per capita income

Source: World Bank, Linkages Model.

Growth of GDP, annual average (percent)

High-income countries Developing countries

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Energy Metals Metals (w/o China) Food

Commodity intensity of GDP, index 1971 = 1

Technological progress increases the efficiency of resource use

Source: World Bank.

Reserves of commodities reflect incentives and remain ample

0

50

100

150

200

250

300

Oil Coal Bauxite Copper

1980199020002007

Source: World Bank.

0

15

30

45

60

75

90

1970 1975 1980 1985 1990 1995 2000 2005

Offshore

Onshore

Higher prices should provide the incentives to continue ensuring additional supply from non-traditional sources

Global oil production, millions of barrels per day

Source: Sandrea and Sandrea (2007).

2.1

1.51.2

2.3

1.7

0.0

0.5

1.0

1.5

2.0

2.5

Ag

ricu

ltu

ral

pro

du

ctiv

ity

All

fo

od

cro

ps

Cer

eals

Ed

ible

oil

s

Mea

t

Globally, agricultural productivity growth exceeds demand growth

Source: Productivity (Coelli and Rao, 2005); Food demand, FAO (2006)

Projected annual average growth rates 2000-2030, per cent

Future policy on biofuels may affect food prices

y = 2.1166x - 3.3711

R2 = 0.7527

0

50

100

150

200

250

300

350

50 100 150

Crude Oil ($/bbl)

Mai

ze P

rice

($/

ton

)

y = 0.4246x + 86.178

R2 = 0.0526

0

50

100

150

200

250

300

350

10 30 50

Crude Oil ($/bbl)

Mai

ze P

rice

($/t

on)


Oil < $50 Oil > $50

Source: Global Warming and Agriculture: Impact Estimates by Country William R. Cline

CGD, 2007

NotAvailable

Losses

Gains

25+ %15-25%5-15%0-5%

25+ %15-25%5-15%0-5%

Climate Impact : Agriculture 2008-2080Without Carbon Fertilization






Average GDP growth rate, 1980-2006 (percent)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Non-fuel primary commodity exportersFuel exportersDiversified exporters

Commodity dependent countries tend to grow less quickly than more diversified exporters

Source: World Bank

0

10

20

30

40

50

60

70

Primary exports p.c. ('00 US$) Primary exports/exports (%)

Low income Lower middle income Upper middle income High income

Value of per capita primary commodities in exports (US$ thousands) /Share of primary commodities in total merchandise exports (%)

Commodity dependent countries tend to be poor, but commodity rich countries tend to be rich

Source: World Bank

Average volatility of export revenues, 1981-2006Standard deviation of percentage change

05

10152025303540

Export Revenues Real Exchange Rate GDP Per Capita

Fuel Exporters Non-fuel Primary Exporters Diversified Exporters

Impact of severe shocks on economic progress

Source: World Bank






Poverty impacts depend on actual food price increases, which varied widely across countries

-5

0

5

10

15

20

25

30

East Asia &Pacific

Europe &Central Asia

LatinAmerica &Caribbean

Middle-East& NorthAfrica

South Asia Sub-Saharan

Africa

Percent increase in real food prices, Dec. 2005 – Dec. 2007

Overall global poverty increased by 130-155 million

01234567

East Asia &Pacific

Europe &Central Asia

LatinAmerica &Caribbean

Middle-East& NorthAfrica

South Asia Sub-Saharan

Africa

Urban

Rural

Increase in poverty rate, percent of population

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

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Documents

Global Economic Prospects Commodities at the crossroads Uri Dadush Andrew Burns World Bank Brussels, Dec. 9, 2009