Commodity Deflation and Its Effects on the World Economy

Slowdown in global activity and commodity deflation

World GDP (gross domestic product) growth for 2015 as forecast by the IMF (International Monetary Fund) in the month of October is 3.1%. Lower commodity and crude oil prices have been one of the main contributors to the global slowdown, among other factors.

Commodity Deflation and Its Effects on the World Economy

Above is a graph that shows the different GDP growth estimates from April to October for the current year.

Why falling energy prices affect advanced economies

The GDP growth projections for advanced economies by the IMF in April, July, October were 2.4%, 2.1%, and 2%, respectively, for 2015.

  • In the United States, the slowdown has been followed by weaker spending in the oil sector, as the United States is the largest producer of crude oil.
  • In Japan, inflation was lower than expected, thereby affecting both consumer spending and net exports.
  • In Canada, crude oil’s fall in price has led to lower capital expenditure, affecting growth projections.

Commodity Deflation and Its Effects on the World Economy

Emerging economy slowdown

The emerging economies GDP growth projections by the IMF in April, July, October were 4.3%, 4.2%, and 4%, respectively, for 2015. In China, imports have contracted, followed by a contraction in domestic consumption. China consumes ~50% of the world’s commodity output.

Most of the ASEAN (Association of Southeast Asian Nations) economies have shown weaker growth because of weaker exports and a slowdown in domestic demand.

Commodity Deflation and Its Effects on the World Economy

Above is a graph that shows the total import, export and GDP growth of emerging economies.

A comparison between developed and emerging market ETFs

Commodity Deflation and Its Effects on the World Economy

The graph above shows the performance of the iShares MSCI Developed Market ETF (EFA) and the iShares MSCI Emerging Market ETF (EEM) since April 2015. From April 2015 to October 2015, both EFA and EEM have been giving negative returns, but the EFA has outperformed the EEM in the stipulated time period.

  • 98% of the the iShares MSCI Developed Market ETF’s portfolio is invested in the stocks of various developed economies. The top ten holdings of the EFA constitutes 12.3% of its total assets. The top three companies in which the EFA invests are Nestle SA (NSRGF), Novartis AG (NVS), and Roche Holding (RHHBY), which constitute 2.0%, 1.8%, and 1.6% of the portfolio, respectively.
  • 75% of the iShares MSCI Emerging Market ETF’s portfolio is invested in the stocks of various emerging economies. The top three companies in the ETF are Samsung Electronics (SSNLF), Taiwan Semiconductor Manufacturing (TSM), and Tencent Holdings (TCEHY), which constitute 3.2%, 2.9%, and 2.6% of the overall portfolio, respectively.