Magazine article Regional Economist

Many Countries Sink or Swim on Commodity Prices-And on Orders from China

Magazine article Regional Economist

Many Countries Sink or Swim on Commodity Prices-And on Orders from China

Article excerpt

Many emerging economies-and also those of some developed countries, such as Australia, Canada and Norway-rely heavily on the production of commodities and their sale to global markets. For example, more than 10 percent of Canada's and Chile's output in 2013 could be attributed to the export of commodities, as can be seen in Figure 1. The equivalent share is much higher for Venezuela and other oil-producing countries. The figure also shows the diversity in the mix of commodities produced and exported, as well as some diversity in the ratio of commodities exported as a percentage of gross domestic product (GDP) across these countries.

In this article, we examine the extent to which the business cycles in emerging countries are highly dependent on fluctuations in the global prices of commodities. As a corollary, we show that the prospects of expansions and contractions for emerging countries are closely linked with the outlook for the countries importing commodities. Additionally, we show how the changing composition of buyers of commodities has made emerging markets increasingly susceptible to the whims of a single buyer: China. Indeed, the recent decline in commodity prices and the slowdown of growth in China go a long way in explaining the recent recessions in Brazil and Canada and may portend further turmoil in many emerging markets.

Commodity Prices and the Business Cycle

Figure 2 shows the deviations from trend of a weighted index of commodity prices and log output for Argentina, Brazil, Canada, Colombia and Russia for all quarters between 2000 and 2016. This cyclical component of prices and output is obtained by estimating and removing the trend component of each variable.1 The red line shows the cyclical behavior of global commodity prices (left axis). The figure shows that commodity prices exhibited significant volatility over the past 16 years. In particular, between 2000 and 2006, commodity prices were trending upward (not shown in figure) with frequent fluctuations around this trend. The year leading up to the Great Recession saw a dramatic increase in the price of all commodities, led largely by increases in energy prices and in the prices for food and beverages. The global recession saw a sharp decline in all prices, only to display an equally sharp recovery by early 2009. The causes of the dramatic recovery in commodity prices are debatable, but by 2011 they had recovered or exceeded prerecession levels.2 Between 2011 and 2014, commodity prices remained relatively stable in trend with small deviations.

Since the summer of 2014, there has been a sustained drop in commodity prices, most noticeably in energy. Some of the decline in energy prices can be attributed to supplyside factors. In particular, the newfound abundance of energy in the U.S. and resulting fight for market share by the Organization of the Petroleum Exporting Countries have led to plentiful supply and falling prices. There is no such obvious supply-side factor that can explain the drop in all other commodity prices, which has attracted much less attention.

The right axis of Figure 2 displays the deviations of output, measured as GDP, from its trend for four emerging market economies and Canada. The figure shows that the cyclical components of output and commodity prices are highly correlated with each other.3 Indeed, the dramatic, fast and sustained recovery in commodity prices must be credited as a major source of the relatively stronger, faster and sustained recovery of emerging markets following the recession, relative to the recoveries in the U.S., Europe, Japan and other major economies.4 Both Figures 1 and 2 make a compelling case for the interlinkages between emerging markets and the prices of commodities: One or two years after the collapse in 2009, a tidal wave in rising commodities prices pushed emerging economies to quickly recover and grow. …

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