KARACHI – The prices of commodities soared in 2010, partly in response to strong global demand but also to supply shocks in the case of certain commodities. Upward pressure on prices is expected to persist in 2011, due to sustained robust demand and the sluggish response of suppliers to tightening market conditions.
As a result, the IMF’s baseline petroleum price projection for 2011 is now $90 per barrel, up from $79 per barrel in October 2010. As for non-oil commodities, weather-related crop damage was greater than expected in late 2010 and its whole impact on price is only expected to be revealed after the 2011 crop season. As a result, non-oil commodity prices are expected to climb by 11 percent in 2011.
The IMF has pointed out these developments in its World Economic Outlook (WEO) update for January 2011, released on Tuesday. The upsurge in consumer price inflation in emerging economies in 2010 was attributed partially to rising food prices.
But the recent bout of high food price inflation has been quite persistent, straining the budgets of low-income households and beginning to drive up overall price inflation in a number of economies. More important, rapid growth in emerging and developing economies has narrowed or in some cases closed output gaps in these economies.
Accordingly, overheating pressures are starting to materialise in some cases. Consumer prices in these economies are projected to rise six percent this year, an upward revision of 0.75 percentage point relative to the October 2010 WEO. Signs of overheating are also becoming apparent in some countries as rapid credit growth or rising asset prices is witnessed.
According to the WEO, the downside risks arise from the possibility of tensions in the periphery of the eurozone spreading to the core of Europe, the lack of progress in formulating medium-term fiscal consolidation plans in major advanced economies, the lagging US real estate market, high commodity prices and the persistent danger overheating and looming threat of boom-bust cycles in emerging markets.
On the upside, there are risks from stronger-than-expected business investment rebounds in major advanced economies. The risk of financial turmoil spreading from the periphery to the core of Europe is a by-product of the continuing weakness of financial institutions in many of the region’s advanced economies and a lack of transparency about their exposure in the case of various factors.
As a result, financial institutions and sovereigns are closely linked, with spillovers between the two sectors occurring in both directions. Although the periphery accounts for only a small portion of the euro area’s overall output and trade, substantial financial linkages with countries in the core as well as financial spillovers through higher risk aversion and lower equity prices, could generate a slowdown in growth and demand that would hinder global recovery.
In the euro area, comprehensive, rapid, and decisive policy actions are required to address risks. Important steps at both the national and the euro-area-wide level have been taken since May, including measures to strengthen fiscal balances and introduce structural reforms, the stepping up of extraordinary liquidity support and the introduction of the Securities Markets Program by the European Central Bank (ECB), and the establishment of the temporary European Financial Stability Facility (EFSF), to be succeeded by the permanent European Stability Mechanism (ESM) after 2013.
The baseline projections below assume that current policy actions manage to keep the financial turmoil and its real effects contained in the periphery of the euro area, resulting in only a modest drag on the global recovery. Activity in the advanced economies is projected to expand by 2.5 percent in 2011-12, which is still sluggish considering the depth of the 2009 recession and unlikely to make a significant dent in high unemployment rates.
Nevertheless, the 2011 growth projection is an upward revision of 0.25 percentage point relative to the October 2010 WEO, mostly due to a new fiscal package passed in late 2010 in the United States that is expected to boost economic growth this year by 0.5 percent. A package with a similar growth impact passed in Japan is expected to sustain a moderate recovery in 2011.
