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Prospects Weekly: Recent rise in metal and mineral prices supports evidence of a pickup in economic activity

Global Macroeconomics Team's picture
Although the recovery remains fragile, the recent rise in metal and mineral prices supports evidence of strengthening activity coming from industrial production and purchasing manager data. Capital flows to several middle-income countries have begun rising again leading to a partial reversal of the depreciation in currencies witnessed in the latter months of 2011. Global imbalances, which peaked in 2007, are on a downward trajectory as aggregate savings in high-deficit high income economies are expected to rise as government savings increases and developing countries increasingly rely on domestic demand for growth.
Recent firming of metal prices adds to evidence of a pickup in economic activity. After declining significantly in the latter half of 2011, metals prices have risen by some 15% this year underpinned by strong demand, supply tightness and lower stocks. As metal prices tend to be highly cyclical, their increase appears to confirm signs of strengthening activity coming from industrial production and purchasing manager data. In contrast, the Baltic Dry Index - which tracks global shipping prices of various dry bulk cargo, and is also considered a good predictor of future economic activity - has fallen sharply in recent months. This decline appears to be mainly a reflection of an expansion in fleet capacity (expected to be up 14% this year) rather than a harbinger of slower economic activity. Oil prices remain broadly stable, with increases in Brent and Dubai prices having been offset by decreases in the price of West-Texas Intermediate crude.
Depreciation of currencies of larger developing countries begins to reverse as capital flows increase. After declining sharply in the last few months of 2011, capital flows to larger developing countries with deeper capital markets has increased significantly since the beginning of this year, as investor skittishness subsides. As a result, the sharp depreciation in real effective exchange rates that was observed among a number of large middle income countries late last year (which in turn followed strong appreciations in 2010) has begun to reverse. Overall, the currencies of many countries remain significantly higher than prior to the Lehman’s crisis. This partly reflects strong productivity growth, but to the extent that appreciations have outpaced productivity, they may also be challenging these countries’ external competitiveness.
Global imbalances have fallen substantially since 2007 and are expected to continue falling. Higher private savings, disinvestment in bubble-related sectors, and weaker currencies in high-deficit high income economies have sharply reduced global current account imbalances (as a share of global GDP) since 2007. Further, although current account surpluses among oil exporters have increased with the recovery in oil prices, they still remain lower than in 2007 as these economies have increased imports in line with higher incomes. The downward trend in global imbalances is expected to continue as fiscal tightening increases savings in high-income countries, and domestic demand in oil-exporting and developing countries continues to strengthen.

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