Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.
Obviously, the declines aren’t good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.
As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union’s confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.
Economic distress for China seems to come when its hypercaffeinated annual growth rate falls below 7 percent where it seems to be heading now. Official Chinese statistics have long been suspect, so growth may already be below 7 percent. Lower growth makes it difficult for the country to provide work for all those who are leaving the countryside and streaming into the cities as China industrializes.
Commodity-exporting nations such as Canada, Brazil and Australia have taken a big hit on declining Chinese and world demand. But, their bourses seem surprisingly buoyant given the extent of the damage.
The commodity price declines aren’t just confined to the industrial and energy commodities mentioned above. Food commodities have been swooning as well recently. Of course, food prices swing based on farm yields which have no necessary relation to the economy at a particular time. What is especially telling about the decline in the prices of foodstuffs is how broad-based it is.
Price declines affected wheat, corn, soybeans, and oats in part due to record harvests. Prices for cocoa declined due to rising harvests and falling demand. But, not every food commodity is experiencing increased harvests. Sugar production has actually declined in the last growing cycle. Yet, sugar prices fell. At the margin, it seems, people are buying less of what are essentially discretionary food commodities such as cocoa and sugar. Does that seem right if consumer buying power is being buoyed by cheaper industrial and energy commodities?
Full article: Bad News For World Economy That No One Wants To Hear (Oil Price)