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Wednesday, 10 December 2008

Global Economic Prospects 2009

The Global Economic Prospects 2009 was released yesterday. World growth will weaken to 0.9 percent next year from 2.5 percent in 2008 with simultaneous recessions in the United States, Western Europe and Japan. The spreading economic downturn will dramatically slow the fast growth of the past decade in the developing world to 4.5 percent, down from 6.3 percent in 2008 and 7.9 percent in 2007. The biggest impact to developing countries will be from slowing investment growth, which is set to decline to 3.4 percent in 2009 from more than 13 percent in 2007. Meanwhile, international trade volumes will fall by 2.1 percent next year, the first drop since 1982. Private debt and equity flows into developing countries should drop to about $530 billion in 2009 from $1 trillion in 2007. The report also notes that the global economic recession will cause both commodity prices and inflation to drop further, with oil prices seen averaging $75 a barrel in 2009, food prices easing by about 23 percent and metal prices to decline by 26 percent. Excerpt :

This year’s Global Economic Prospects finds the global economy at a crossroads, transitioning from a sustained period of very strong developing country–led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide. Commodity markets too are at a crossroads with the very high prices of 2007 and early 2008 having fallen by more than half in many instances.

Great uncertainty surrounds the implications of this crisis for developing countries. Initially, the repercussions for developing countries of the financial turmoil that characterized 2007 and the first half of 2008 were limited. However, since September 2008, the intensification of the banking crisis, the collapse of several global financial players, and the sharp increase in emerging market bond spreads have dramatically altered the outlook for developing countries. These events constitute the kind of disorderly adjustment that has been discussed in previous reports as a risk. Materialized, it implies a sharp slowdown for developing countries and the possibility that serious crises may emerge.

While the measure of that slowdown and its near-term implications for growth and incomes are important, governments in developing countries also need to be mindful of the longerterm implications of their policy response. Thus, while countercyclical policy may help reduce the short-term costs of the slowdown, care must be exercised to react prudently so as not to endanger longer-term fiscal sustainability and growth prospects. For as serious as the coming slowdown may be, developing-country growth is expected to recover after the crisis is over.

Commodity markets have seen spectacular swings over the past 24 months as enormous tensions first built up and were then released. The extended and sharp rise in commodity prices prompted concerns that the world was transitioning into a new phase of commodity scarcity—a concern that the recent dramatic drop in commodity prices has only partially alleviated. Long-term supply and demand prospects for commodities suggest that while commodity prices are likely to be higher than they were during the 1990s and early 2000s (when they were depressed by excess supply), the recent peaks that have been observed are unlikely to be the new norms. Over the long run, demand for commodities is not expected to outstrip supply. Even though per capita incomes in developing countries are expected to continue rising rapidly, population growth is slowing and with it global GDP growth. As a result, the pace at which commodity demand expands should also ease. Assuming that efficiency with which commodities are both employed and produced continues to improve as it has done over the past few decades, supply should keep pace with demand.

However, policy will need to be supportive if such a positive result is to materialize. In particular, agricultural yields have declined in recent years. Unless governments in developing countries and aid agencies take concrete steps to increase investment in rural infrastructure, agricultural research and development, and agricultural extension services, it is possible that global agricultural productivity growth will slow. Higher food prices would follow and many countries that are now self sufficient in food (notably those that still have fast growing populations) would become large net importers of food. On the energy side, policies to combat carbon emissions would help slow the depletion of hydrocarbon resources, by speeding both demand-side and supply-side substitution toward cleaner energy sources. If successful in slowing global warming, these could also help prevent the very large agricultural productivity losses predicted by some in the second half of this century.

The recent boom in commodity prices has challenged policy makers in both producing and consuming countries. Encouragingly, commodity producers appear to have managed their windfall revenues more prudently than in the past. Instead of expanding spending programs in line with increased revenues, many have saved a much larger share of these revenues—reducing the likelihood that they will need to cut back spending in a procyclical manner now that commodity prices (and global growth) have declined. However, countries with new-found commodity wealth or newly independent commodity-rich states have not shown similar restraint and may encounter more difficulties during the current downturn.

Reading through the report, its very much as we expected. However, I couldn't help but think that perhaps other developing nations are better positioned than we are to withstand the coming storm, given the "windfall gains" they appear to have captured whether from oil or higher metal prices, their relative superior fiscal discipline, focus on infrastructure spend, and the extent to which some have moved rapidly to ensure they do not become net importers of food. I truly hope its just my unfounded worries!


  1. There is an interesting take on the recession/depression from Jim Rogers, who was right about the commodities rally.

    Virtually the only asset class I know where the fundamentals are not impaired - in fact, where they are actually improving - is commodities. Farmers cannot get a loan to buy fertilizer right now. Nobody's going to get a loan to open a zinc or a lead mine. Meanwhile, every day the supply of commodities shrinks more and more. Nobody can invest in productive capacity, even if he wants to. You're going to see gigantic shortages developing over the next few years. The inventories of food worldwide are already at the lowest levels they've been in 50 years. This may turn into the Great Depression II. But if and when we come out of this, commodities are going to lead the way, just as they did in the 1970s when everything was a disaster and commodities went through the roof.

    What I've been buying recently is agricultural commodities. I've also been buying more Chinese stocks. And I'm buying stocks in Taiwan for the first time in my life. It looks as if there's finally going to be peace in Taiwan after 60 years, and Taiwanese companies are going to benefit from the long-term growth of China.

  2. I think it is pretty clear that the best investment the GRZ can make right now, is in agriculture.

    I think there should be a holistic plan to develop agriculture and the rural areas, food storage capacity, and a switch to biofuels away from imported (and traded in dollars) fossile fuels.

    Existing diesel engines already have the capacity to run biodiesel.

  3. Recovery in Korea?


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