Slowing global growth
So far, 2015 is shaping up to be another disappointing year. The International Monetary Fund (IMF) recently lowered its full year estimate for global growth to a bit below last year. In the United States, 2015 gross domestic product (or GDP) growth estimates have fallen by nearly a full percentage point since February, according to Bloomberg data. Slower growth negatively impacts cyclical commodities, like energy and industrial metals. As economic activity decelerates, so too does demand for these commodities.
Market Realist: Slower growth in China spells doom for commodities.
In its updated “World Economic Outlook,” the IMF estimates that the global economy will accelerate by 3.3% in 2015. This is a downward revision from its estimate of 3.5% growth for 2015 in April. The IMF’s forecast for 2015 GDP (gross domestic product) growth in the US (IVV) fell from 3.1% in April’s outlook to 2.5% in the July update.
China’s (FXI) economic growth rate is expected to slow further, partly because a perennially high growth rate isn’t sustainable. Also, China is transitioning from being an investment-driven economy to a consumption-driven one.
Remember that China is the biggest trading parter of many major global economies. So slowing growth in China is bad news for those economies, and contagion is a possibility. Commodity-driven economies such as Australia (EWA), Russia (RSX), and Brazil (EWZ) could feel the heat, because a slowing China means less demand for their commodities. Russia and Brazil are already reeling from lower commodity prices.
As we discussed in the previous part of this series, industrial commodities are likely to see lower prices as demand falls with slowing global growth. While commodity prices have taken a huge hit recently, a decent entry point doesn’t seem to be on the horizon.