New Delhi – The near-term future looks bleak for commodity exporting economices as the outlook for energy and metals prices continues to remain poor, an International Monetary Fund (IMF) studya said.
The study, published in the forthcoming 2015 World Economic Outlook, suggests that recent declines in commodity prices could shave off one percentage point annually from the growth rate of commodity exporters over 2015-17 as compared with 2012-14. In exporters of energy commodities, the drag is estimated to be even larger—about 2¼ percentage points on average.
This slowdown is not just a cyclical phenomenon, the study finds. “It has a structural component as well,” says lead author OyaCelasun, Deputy Division Chief in the Research Department. “Investment, and accordingly, potential output, tend to grow more slowly in exporters during commodity price downswings.”
Commodity prices are unpredictable and can be very volatile. They can remain high or low for prolonged periods, giving the impression that their levels are permanent, only to exhibit very sudden and large changes.
Recent history is no exception, the study said, adding that the first decade of the 2000s saw a persistent surge in commodity prices from record lows in the mid-1990s to record highs by 2011. More recently, however, the prices of commodities have fallen again, some in a dramatic fashion, and are expected to remain weak for some time, the study said.
What does the behavior of economic activity during past commodity price cycles imply for the current downswing? While the size and duration of the 2000s commodity boom exceeded its historical average, its reversal could lead to a sharper slowdown now. However, a typical commodity exporter is now better equipped to deal with a downswing than in earlier episodes.
Despite the more pronounced commodity price boom, growth rates over the last decade have been in line with earlier boom episodes and inflation rates have remained more subdued. This suggests that macroeconomic policies were more successful in smoothing the impact of the commodity windfall than in the past, as there was less of a growth boost than one would have expected given the size of the increase.
More specifically, fiscal policy has been less pro-cyclical—allowing for greater savings out of resource revenues—exchange rates have been more flexible, and financial depth has increased relative to the earlier episodes. All these factors were associated with smaller drops in output growth during previous downswings.
In addition, commodity exporters are entering the current downswing with stronger external positions, which can also help mitigate the effect of the commodity price downturn on their economies.