Everyone likes a bargain. But this one could spell trouble for the global economy.
Led by a steep slide in energy prices over the last 12 months, the prices of a wide range of global commodities—everything from iron ore to sugar—has been falling lately, in part, due to slower demand from once red-hot developing economies like China.
That’s prompted fears that the slowdown may continue to take hold around the world.
When the 2008 financial collapse left the global economy reeling, governments from Washington to Beijing slashed borrowing costs and spent borrowed money to revive growth. The global economy responded. But in the last 12 months, the recovery has begun to lose steam, especially in China and the rest of the developing world.
Last summer, a crude oil glut on global markets led to a price slide that eventually cut prices in half, pushing inflation rates toward zero. Most economists saw the drop as a temporary price pullback based on the one-time plunge in energy costs. The hope is that lower energy prices will help spur continued growth—and that the drop in overall inflation is a passing phase. “A large part of the current inflation is temporary,” Federal Reserve Vice Chairman Stanley Fischer told Bloomberg TV on Monday. “It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials.” After stabilizing earlier this year, oil prices have resumed their downward march, falling by roughly a quarter in the last month alone. That drop helped drag one widely watched benchmark, the Reuters Commodity Research Bureau index, some 10 percent lower in July to the lowest level since the depths of the Great Recession in early 2009. Cheaper energy, food and other raw materials can be a boon to consumers. But if commodity prices continue falling, the resulting deflation can act as a damper on growth, as business and consumers hold off purchases until goods become cheaper. Households, companies and governments that borrowed money are also losers as those debts become more expensive to repay. Consumer prices are barely rising in much of the developed world, sparking renewed fears among investors that if deflation takes hold, it could erode the value of their investments.
In the second quarter, overall global inflation had fallen to 1.6 percent from 2 percent at the end of last year, according to JPMorgan.
In its most recent economic outlook, the International Monetary Fund trimmed its forecast for global growth this year by two-tenths percentage points, to 3.3 percent this year. IMF economists see global growth picking up to 3.8 percent next year. The growth forecast for the U.S. was trimmed by six-tenths of point, to 2.5 percent this year, rising to 3 percent in 2016.
Some countries will fare better than others if commodity prices keep falling, according to Neil Shearing, who follows emerging markets at Capital Economics. Major commodity exporters are the biggest losers; Shearing counts Russia, Nigeria, Zambia, Venezuela Chile and Colombia among the biggest losers. On the other hand, big commodity importers—including Korea, Morocco, India and Thailand—are the biggest beneficiaries of the commodity price plunge.
Closer to home, falling prices have prompted many businesses to take a more cautious approach. One recent signal came from a survey of small businesses by economists at Wells Fargo Securities.
The survey found that, while small businesses were feeling more confident about their own finances, they were less confident about their own growth prospects.
“We suspect much of the recent decline is tied to the pullback in commodity prices and concerns about how the slower global economic growth and the stronger dollar will effect business,” according to Wells Fargo economists.