The numbers are getting truly ugly.
Markets are seeing far less turmoil so far Thursday, but after Wednesday’s selloff various estimates put the value destruction among global equities at an astounding $15-trillion (U.S.). Surely, the rout signals that worldwide economic growth is about to swirl down the toilet. Investors are usually right, right?
This time, maybe not, though you can’t fault them for their pessimism, given the wholesale slaughter in the commodities markets in recent weeks.
In morning trading in Europe, Brent crude, the international benchmark, was down slightly, at $27.70 a barrel. The price has fallen 43 per cent in the last year and 75 per cent since mid-2014, when the relentless slide began. The Shanghai market lost 3.2 per cent overnight but the FTSE 100 index was up marginally and the euro was stable against the dollar on the day the European Central Bank was set to deliver its latest decision on interest rates.
All other commodities – nickel, zinc, copper, aluminum, iron ore – have joined oil on its submarine run. In the last 12 months alone, the Bloomberg commodity index is down 29 per cent. Glencore, the world’s biggest commodities trader and one of the world’s biggest mining companies, is a good proxy for the health, or lack thereof, in commodities land. Its shares have fallen more than 70 per cent in the last year.
Broadly speaking, commodities lose value when demand falls. Demand falls when economies lose growth momentum or go into reverse. Surely, the commodities markets are saying the end is nigh for growth, so sell, sell, sell.
Not so fast. Yes, growth in some big economies, notably China, has become weaker (even if China is still expanding at rates that Europe and North America would kill for) but the commodities plunge does not necessarily mean it’s time to load the F-150 with survival rations and guns and head for the hills. Commodities are falling because one of the biggest commodities bubbles since the Second World War, perhaps the biggest, is deflating at an alarming rate.
The bubble formed when world’s biggest mining companies, from Glencore and Rio Tinto to Anglo American and Vale, bought into the “stronger for longer” cycle on the assumption that China would devour everything that was gouged out of the ground in ever greater quantities for decades to come. It appears they miscalculated, big time – China’s growth rates have fallen to 6 to 7 per cent a year from 10 to 11 per cent. As fortunes were casually tossed into mine development everywhere, supply surged, to the point it exceeded demand growth.
As for oil, global demand is not actually falling. There’s simply too much of it around, thanks to the U.S. shale revolution, the expansion of the Alberta oil sands, the return of Iran to the export markets and relentless pumping by OPEC, which is bent on regaining market share lost to the Americans, the Canadians and the Russians.
In that sense, OPEC is no longer a cartel; it is just another player, albeit a big one, in the global oil free-for-all. For the first time since OPEC was formed in 1960, the global oil markets are truly competitive and robust competition tends to drive prices down. Cynical geopolitics is helping. Saudi Arabia is unlikely to reward its enemy, Iran, by curtailing its own oil production to prop up prices.
Students of oil and economics will realize that crude prices are a reliable predictor of economic trends, but only in the contrary sense. Historically, rising oil prices have anticipated recessions, as they did before the 2008 Great Recession, when oil reached $147 a barrel. At the same time, falling oil prices have anticipated rising economic growth. When oil prices fell sharply between 1992 and 1993 and between 2001 and 2002, to take but two instances, global growth took off.
The oil price plunge is unambiguously good news for the global economy. It transfers trillions of dollars of wealth from oil exporting countries to oil consuming countries. Since there are a lot more of the latter, the net effect is positive even if it causes enormous pain to the likes of Saudi Arabia, Russia, Nigeria and Venezuela. When fuel prices fall, consumer buying power increases, especially in regions, like Europe, that are clogged with cars. A cheaper fill-up is the equivalent of a tax cut.
To be sure, the markets may be selling off for reasons beyond fears of a global recession. Some investors are unnerved by the new rate-hiking agenda by the U.S. Federal Reserve. Some fear that the commodities rout could trigger a massive bankruptcy or two among the big commodities companies, triggering another bank crisis. There is a legitimate concern that China’s growth rates are tumbling faster than the official figures indicate.
But falling oil prices, coupled with low interest rates and stimulus measures here and there, could also signal a return to rising global growth rates. If that were to happen, the markets could lose their fear factor.
On Thursday, Capital Economics delivered a rather bullish signal. In a new forecast, it said that “despite the prevailing gloom about the world economy, we think global growth will pick up from around 2.5 per cent last year to 3 per cent in both 2016 and 2017.”
ROME — The Globe and Mail
Published Thursday, Jan. 21, 2016 5:50AM EST
Last updated Thursday, Jan. 21, 2016 5:54AM EST