## IMF Survey: Commodity Price Moves and the Global Economic Slowdown

_IMF News, March 20, 2008_

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## Bibliographic details
- Authors: Thomas Helbling, Valerie Mercer Blackman IMF Research Department March
- Published: March 20, 2008

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### Rising commodity prices and recent trends
- IMF's commodity price index has risen by a cumulative 10 percent in 2008 after having already increased by about 30 percent between December 2006 and December 2007.
- Oil prices:
  - Surged from around $90 a barrel in late January 2008 to over $105 a barrel by mid-March 2008.
  - Surpassed their previous record high in constant prices set on December 17, 1979.
- Base metal prices rebounded after falling during the second half of 2007.
- Price spikes in 2008 were influenced by both supply shocks (e.g., wheat, tin) and unexpected large increases for other commodities.

### Apparent disconnect between commodity prices and global slowdown
- Observation: Commodity prices remained strong despite intensifying credit market problems and slowing growth in advanced economies.
- Historical pattern: In all recent global downturns, commodity prices declined sharply, suggesting a current disconnect.
- Explanation:
  - Emerging and developing economies have accounted for virtually all recent commodity demand growth and have been less affected by slowing growth in advanced economies.
  - Financial factors have more recently reinforced price momentum.
- Key dependence: The continued resilience of commodity prices will depend on the extent of spillovers of slowing growth in advanced economies to the rest of the world.

### The financial side of commodity markets
- Commodities act as both consumable/production inputs and as financial assets.
- Financial drivers pushed prices up in recent months:
  - U.S. dollar depreciation and falling short-term real interest rates increased the attractiveness of commodities as alternative assets.
  - Gold surged to record-high real levels.
  - High returns and low correlation with other asset classes led to increased use of commodities for portfolio diversification and rising inflows into commodity funds and assets.
- Overall assessment: Financial factors seem to explain a large part of the increase in crude oil prices so far in 2008 and the rising prices of other commodities.

### Factors underpinning commodity market tightness and attractiveness
- Rapid growth in emerging economies fuels demand:
  - Incoming data underline continued strength from emerging economies.
  - These economies have greater commodity intensity and have accounted for virtually all demand growth in recent years.
- Food demand boosted by biofuel production:
  - Half of the increase in global corn consumption in 2007 was related to ethanol production.
  - The recent U.S. Energy Bill will ensure continued increases in demand from this source.
  - Resulting spillovers: higher feed costs, crop substitution, demand substitution, and spillovers to other food commodity prices.
- Sluggish supply response to higher prices:
  - Demand has pushed supply up against capacity limits; for oil, demand has caught up with capacity after decades of substantial spare capacity.
  - Capacity expansion constrained by escalating costs (geological and technological constraints), sharply higher royalties and taxes, shortages in skilled labor and specialized equipment.
  - For biofuels, supply response will likely be gradual; for metals and minerals, infrastructure bottlenecks have hampered rapid capacity expansion.

### Impact of high commodity prices
- Inflationary pressures:
  - Rising fuel and food prices have boosted headline inflation in many countries.
  - The inflation impact of food price increases is of particular concern for emerging and developing economies because the corresponding expenditure shares exceed those of oil-related spending by a substantial margin.
  - The impact on headline inflation will persist through much of 2008 even without further increases in underlying commodity prices.
  - Risk of higher inflation expectations and second-round effects that could constrain monetary policy amid spillovers from slowing growth in advanced economies.
- Economic demand effects:
  - Rising commodity prices increase cost pressures on producers and reduce household purchasing power in commodity-importing countries, amplifying the downdraft from the credit market crisis on consumers in advanced economies.
  - At the global level, demand subtractions are unlikely to be fully offset by higher expenditure in commodity-exporting countries despite substantial terms of trade gains.
- Distributional and social effects:
  - Rising commodity prices, especially food items, have posed an increasing burden on the poor in emerging and developing economies where food-related expenditure of the poor is much larger as a share of household expenditure than for other income groups.
  - Policy responses by some countries have included reducing import barriers, increasing export taxes, and instituting subsidies that reduce price pass-through, sometimes at considerable fiscal cost.
  - Policy recommendation where possible: use well-targeted cash transfers as the main instrument to relieve social pressures from rising food prices.

### Commodity price prospects and outlook
- With global growth widely expected to decline in 2008-09, commodity demand will likely soften and prices of most commodities should eventually start easing.
- Caveat: Unless there is a substantial global downturn, the extent of easing may be small given current tight balances in some commodity markets.

*IMF Survey: Commodity Price Moves and the Global Economic Slowdown — By Thomas Helbling and Valerie Mercer Blackman; IMF Research Department; March 20, 2008.*

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## Content in this bundle

- [030507 (PDF)](/external/np/pp/2007/eng/030507.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Research](https://www.imf.org/en/news/search)
- [F&D: commodities background](https://www.imf.org/external/pubs/ft/fandd/2008/03/helbling.htm)
- [Africa: Coping with hikes](https://www.imf.org/external/pubs/ft/survey/so/2008/CAR032008A.htm)
- [Bio-Tchané interview](https://www.imf.org/external/pubs/ft/survey/so/2008/INT032008A.htm)
- [Managing impact of oil prices](https://www.imf.org/external/pubs/ft/survey/so/2008/POL032008A.htm)
- [IMF urges action on global financial system](http://www.imf.org/external/pubs/ft/survey/so/2008/NEW031208A.htm)
- [Food and biofuels: price of success](http://www.imf.org/external/pubs/ft/survey/so/2007/RES123A.htm)
- [High oil prices challenge policymakers](http://www.imf.org/external/pubs/ft/survey/so/2007/RES1120A.htm)
- [Oil boom tests exporters](http://www.imf.org/external/pubs/ft/survey/so/2007/RES0830A.htm)
- [Riding crest of oil boom](http://www.imf.org/external/pubs/ft/survey/so/2007/CAR1030A.htm)
- [IMF's commodity price index](https://www.imf.org/external/np/res/commod/index.asp)
- [Finance & Development](https://www.imf.org/external/pubs/ft/fandd/fda.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sores032008a_