Commodities | May 19 2006
By Chris Shaw (Tokyo)
Despite the recent increase in official interest rates in the US the outlook for both US and global growth remains positive, with St George Bank noting most commentators are continuing to forecast above average GDP growth for both this year and 2007.
The economics team at Commonwealth Bank agrees, noting the trend in May was for upward revisions to growth forecasts for most major economies. It notes growth in the US is expected to come in at 3.4% this year, driven by an increase in forecasts for consumer and capital spending, though the full impact will be diluted by the higher interest rates and the impact of the downturn in the housing market and high energy prices.
Its estimate for Japan’s growth has been nudged up to 3% from 2.9% previously thanks to the expectation the strong labour market will prove supportive for consumer spending, while growth in China is forecast to be 9.6% this year and 8.8% next year, compared to previous forecasts of 9.1% and 8.6% respectively.
The bank points out the higher growth estimates come at the cost of higher inflation, with the forecast in the US now for an inflation rate of 3.2% against 2.9% previously. The forecast for Europe is now 2.1%, which is above the central bank’s target and the Commonwealth’s previous forecast of 2%, so there is likely to be further upward pressure on interest rates in its view.
This upward move in inflation expectations has prompted Citigroup to cut its global growth estimates, as while it expects the Fed will pause at current headline interest rates of 5% it may be forced to tighten further if inflation continues to rise. Citigroup continues to expect a pause in the cycle in the short-term though, as it takes the view the previous increases in interest rates are slowing consumption to some extent.
Supporting the broker’s decision to cut its growth estimates is the expectation of an ongoing rebalancing of interest rates globally, with both Japan and Europe expected to push official rates higher in coming months.
The broker notes this has implications for the commodity price boom, as historically commodity prices have struggled when real interest rates in the US are above 3%, which is their current level.
This time it is different though in its view, as demand from China has altered the normal supply-demand equation. As a result, Citigroup suggests further cuts to global growth estimates would be required to signal the end of the uptrend in commodities.
St George Bank agrees but also suggests commodity prices have gotten out of line with fundamentals, so the current correction is overdue in that sense. As an example, it notes both oil supply and the oil price have risen in the past two years, the opposite of the usual trend of opposite movements in supply numbers and the underlying commodity price.
Longer-term though the bank remains positive on the commodity story, noting the strong global growth has been supportive for prices and growth expectations remain good both this year and next year.