Global Economic Overview: March 2014

Global Economy Lifted By Brighter U.S. and Europe Outlook

The global economy appears to be on a more positive footing now, when compared to the beginning of this year, helped by the healthier signals from the U.S. as well as Europe. Labor markets in the U.S. have rebounded from the winter slowdown and helped revive consumer sentiment. Europe is also seeing further improvement in consumer and business sentiment, despite the persistently high unemployment rates. In contrast, Japan is seeing slower than expected growth ahead of the scheduled hike in consumption taxes in April. Some of the emerging economies continue to face headwinds, while the outlook for select others could improve if the expected political changes and reform initiatives materialize later this year. The International Monetary Fund has marginally lowered its global growth forecast for this year as well as 2015, as the resource exporting countries such as Russia, Brazil, and South Africa are expected to see slower expansion.

Global manufacturing output growth moderated in March, but continued to expand at a healthy pace. Factory output in the U.S. and the Euro-zone remained close to the level seen in February, but Japan saw a slowdown as expected. The manufacturing sector in China remained mostly stagnant for the second successive month, while India, Taiwan, Brazil and Mexico continued to expand at a slower pace. Global services output also expanded further in March, helped by gains in the U.S. and China.

Global equity prices were mostly unchanged during the month as select developed markets corrected on valuation concerns, especially in the technology and healthcare sectors. Emerging markets outperformed in March, helped by the renewed interest in countries such as Indonesia, India, Brazil, and Turkey, which saw steep price corrections last year.

Global industry spotlight for the month: Materials 

Even as the global economy continues to see a moderate recovery, the prospects of the materials sector remain markedly weaker than during the pre-recession period. Less resource intensive growth in the emerging markets and additional capacity going online are likely to keep the outlook for the sector relatively subdued.

The materials sector was one of the biggest beneficiaries of the global economic upswing that lasted until 2008. Surging demand for industrial materials in the large emerging countries created an unprecedented boom, now widely called the commodity super-cycle. Growing exports lifted the economies of several resource producing countries in Latin America, Africa, as well as the Pacific. But the good times came to an abrupt halt when the global economy slipped after the 2008 financial crisis. International commodity prices recovered some of the lost ground in subsequent years, as several major countries launched massive stimulus measures to prop up their economies. Expectations of an extended run for the commodity super-cycle rose again, as China and other major commodity importers appeared to regain their lofty growth pace.

However, such expectations have been belied as commodity prices in general have not reacted appreciably to the positive trends in the global economy since the second half of 2013. Iron ore prices have slipped this year and are well below the post-recession peak reached in early 2011. Copper and lead prices have also seen similar price trends, while nickel has seen a bigger drop. The International Monetary Fund’s Commodity Metal Price Index is currently at its lowest level since the end of 2009. Energy prices have been an exception as geopolitical risks continue to keep the markets on edge.

Despite the weak price trends, mining capacity is increasing across the globe. These are the facilities that were planned and financed before the crisis, when few doubted the demand projections and raising capital was easy. Global copper output is likely to increase by 0.8 million tons this year, or nearly 5 percent of current global output, according to the International Copper Study Group. Similarly, iron ore output is also set to rise this year and the world is expected to see a surplus if demand from China and other emerging countries slip further. Iron ore shipments from Australia are likely to rise nearly 20 percent this year, estimates the country’s Bureau of Resources and Energy Economics. As investments in the new production facilities have already been made, it will be difficult to scale back output even when prices are no longer lucrative.

It is also likely that future growth in the large emerging countries such as China would not be as resource intensive as in the past. As they shift to a more consumption driven growth model, the current high level of infrastructure investments may not be maintained. Accordingly, these countries would likely consume lower quantities of industrial materials for future expansion.

Nevertheless, demand for materials could rise in the long run as large and populous countries such as India and Indonesia start addressing their infrastructure shortfalls. As their economies develop, they would need to significantly upgrade their physical infrastructure, just as China did over the last two decades. Yet, the prospect of another sharp upsurge in prices of industrial commodities is limited and moderate gains spread over a longer period appear more likely.

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