1. Global Economic Prospects Commodities at the crossroads
Andrew Burns
World Bank
Paris, Dec. 8, 2009

2. Macroeconomic prospects
The financial crisis is massive and global
Despite improved fundamentals, developing countries are being engulfed by the crisis
Very severe downside scenarios possible, but most likely is an extended global recession
Food and fuel crisis has left developing countries more vulnerable
Continued vigorous policy response required to mitigate effects and prevent recurrence

3. A massive, global, crisis
World output growth down from +3% in 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.

4. Growth of real GDP, Q1-2008 to Q3-2008, percent change annualized
High-income OECD countries falling into potentially deep synchronous recession
Growth of real GDP, Q to Q3-2008, percent change annualized Q1 Q2 Q3
Source: World Bank and National Agencies.

5. Macroeconomic prospects
The financial crisis is massive and global
Despite improved fundamentals, developing countries are being engulfed by the crisis
Very severe downside scenarios possible, but most likely is an extended global recession
Food and fuel crisis has left developing countries more vulnerable
Continued vigorous policy response required to mitigate effects and prevent recurrence

6. Output in emerging markets also slowing sharply
Industrial production,
annualized percent change, 3m/3m
China
Developing excl. China
High-income OECD
Source: World Bank

7. Crisis has sharply tightened credit conditions in developing countries
Emerging-market bond spreads
Basis points
Source: JPMorgan 7

8. Bank lending, bond and equity issuance
Gross private capital flows to developing countries contract by nearly one-half
Bank lending, bond and equity issuance
$ billions
(12-month moving average)
August 2007
Bank lending
Equity issuance
Bond issuance
Source: World Bank.

9. Private capital flows set to decline more sharply still in 2009
$ billions
Net private debt and equity flows
, projected
Percent
Percent of GDP
(right axis)
Source: World Bank.

10. Macroeconomic prospects
The financial crisis is massive and global
Despite improved fundamentals, developing countries are being engulfed by the crisis
Very severe downside scenarios possible, but most likely is an extended global recession
Food and fuel crisis has left developing countries more vulnerable
Continued vigorous policy response required to mitigate effects and prevent recurrence

11. Annual fixed investment growth 1992 to 2007, projected 2008-2010
For middle income countries tight credit conditions are expected to cut sharply into investment spending in 2009
Percent
Annual fixed investment growth 1992 to 2007, projected
Source: World Bank.

12. For low-income countries the main transmission mechanism will be from trade, commodities and remittances
Terms of trade for Low-income countries
Exports hit by declining OECD and middle-income demand; terms of trade – where earlier a benefit – moves against economies.
Slower gains in worker remittances and tourism amidst OECD recession carry negative effects; fears of shortfall in aid are widespread.
Projected growth in remittance flows
South Asia
Africa
Source: World Bank.

13. Sharp decline in GDP growth expected
Growth of real GDP, percent
Developing
Slide 4: Developing countries: a robust outlook [enter]
Nevertheless, it is important to emphasise that even with this slowdown growth among developing countries is expected to remain above trend.
Moreover, over the past few years has been substantially stronger than during the past two decades.
This mainly reflects substantial structural reforms efforts undertaken by many governments, more prudent monetary and fiscal policies that have succeeded in:
lowering inflation by 50 percent,
reducing trade barriers by 50 percent
reducing fiscal deficits/ debt and debt-financing charges by substantial margins.
High-income
Source: World Bank.

14. World trade to contract in 2009 for the first since the early 1980s
annual percent change in trade volumes
Developing country exports
World trade volume
Source: World Bank.

15. Macroeconomic prospects
The financial crisis is massive and global
Despite improved fundamentals, developing countries are being engulfed by the crisis
Very severe downside scenarios possible, but most likely is an extended global recession
Food and fuel crisis has left developing countries more vulnerable
Continued vigorous policy response required to mitigate effects and prevent recurrence

16. Food and fuel shock has left developing countries more vulnerable (1)
Median inflation rates: Jan 2000 to Sep 2008
Developing countries
High-income OECD
Source: World Bank.

17. Food and fuel shock has left developing countries more vulnerable (2)
Current account balance
(Developing oil exporters - x China)
(% of GDP) ,
Overall budget balance
(% of GDP)
Source: World Bank.

18. Macroeconomic prospects
The financial crisis is massive and global
Despite improved fundamentals, developing countries are being engulfed by the crisis
Very severe downside scenarios possible, but most likely is an extended global recession
Food and fuel crisis has left developing countries more vulnerable
Continued vigorous policy response required to mitigate effects and prevent recurrence

19. Developing country policy prescriptions: Vigilance and prudence
Watch carefully for signs of domestic banking-sector stress and react swiftly – rapid enlistment of IMF support where necessary
Allow automatic stabilizers to operate, active countercyclical policy an option in only few countries
Maintaining spending, especially in infrastructure and other investments that will contribute to future output is a key desiderata

20. 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

21. The recent boom was one of the largest, longest lasting and involved more commodities
MUV-deflated US$ (2000=100)
Agriculture
Metals
Commodities boom is unprecedented
Duration (5 years)
Across all commodity groups
Amplitude, xx-fold increase in metals, xx-fold …
Oil
Source: World Bank

22. As with earlier booms, the slowdown in global growth has brought the boom to an end
Real prices of internationally traded commodity prices in developing countries, CPI-deflated Indices, Jan. 2000=100
Energy
Figure 2.3 Oil and metal prices led this boom with food prices rising only much later
Source: World Bank.
Metals and minerals
Food

23. 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
Figure 2.xx Most of the decline in global grain stocks reflects lower stocks in China
Source: World Bank calculations using USDA data

24. 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

25. Slower population growth and lower investment rates will ease commodity demand
Growth of GDP, annual average (percent)
High-income countries
Developing countries
Figure O.3 Slower population growth should result in weaker GDP and commodity demand
Source: World Bank, Linkages Model.

26. Technological progress increases the efficiency of resource use
Commodity intensity of GDP, index 1971 = 1
GDP growth has boosted demand for virtually all commodities in the most recent period, but with the exception of metals demand in China the commodity intensity of demand has been declining.
Source: World Bank.

27. Reserves of commodities reflect incentives and remain ample
Source: World Bank.

28. Higher prices should provide the incentives to continue ensuring additional supply from non-traditional sources
Global oil production, millions of barrels per day
Figure 2.20 Almost all of the additional oil supply since the 1970s has come from nontraditional sources
Source: Sandrea and Sandrea (2007).
Source: Sandrea and Sandrea (2007).

29. Globally, agricultural productivity growth exceeds demand growth
Projected annual average growth rates , per cent
Figure 2.25 Most recently, yield growth has decelerated
Source: World Bank calculations based on US Department of Agriculture data
Source: Productivity (Coelli and Rao, 2005); Food demand, FAO (2006)

30. Future policy on biofuels may affect food prices
Oil < $50
Oil > $50
Source: DEC Prospects Group.

31. Climate Impact : Agriculture 2008-2080 Without Carbon Fertilization
Not
Available
Losses
Gains
25+ %
15-25%
5-15%
0-5%
Source: Global Warming and Agriculture:
Impact Estimates by Country
William R. Cline
CGD, 2007

32. 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

33. Commodity dependent countries tend to grow less quickly than more diversified exporters
Average GDP growth rate, (percent)
Figure 3.1 More diversified developing countries grew more rapidly,
Source: World Bank
Source: World Bank

34. Commodity dependent countries tend to be poor, but commodity rich countries tend to be rich
Value of per capita primary commodities in exports (US$ thousands) /
Share of primary commodities in total merchandise exports (%)
Figure 3.xx The poorest countries are the most dependent on, but the least rich in, primary commodities
Source: World Bank
Source: World Bank

35. Impact of severe shocks on economic progress
Average volatility of export revenues, Standard deviation of percentage change
Box figure Economies dependent on primary commodities experience more volatility
Source: World Bank
Source: World Bank

36. 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

37. Poverty impacts depend on actual food price increases, which varied widely across countries
Percent increase in real food prices, Dec – Dec. 2007

38. Overall global poverty increased by 130-155 million
Increase in poverty rate, percent of population

39. 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
Figure 3.15 Policy responses to rising food prices
Source: Revenga, Wodon and Zaman 2008.

40. 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

41. Global Economic Prospects Commodities at the crossroads
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