The IMF released its World Economic Outlook (WEO) overnight.
While the really big news was that the IMF downgraded its US growth forecast for 2015 and 2016 to 3.1% (down 0.5% and 0.2% from previous forecasts) there was more bad news for Australian in the expectation that metals prices will continue to fall in 2015 and not stabilise until 2016.
For Australia the IMF is projecting growth of 2.8 percent in 2015. This, the WEO says, is “broadly unchanged from the October prediction, as lower commodity prices and resource-related investment are offset by supportive monetary policy and a somewhat weaker exchange rate.”
But the report went on to say:
The downturn in the global commodity cycle is continuing to hit Australia’s economy, exacerbating the long-anticipated decline in resource-related investment. However, supportive monetary policy and a somewhat weaker exchange rate will underpin nonresource activity, with growth gradually rising in 2015–16 to about 3 percent (broadly as projected in the October 2014 WEO)
On metals specifically the report highlighted that its not only the big supply increase that is hitting the market but also “slower demand growth in China.”
While the IMF expects global metal consumption to continue growing “moderately, with slowing growth in China partly offset by higher demand growth in the rest of the world as economic activity recovers,” the report notes that, “the slowdown in growth in China is occurring in most sectors, but most notably in construction. China consumes about 47 percent of the world’s base metals (up from 13 percent in 2000) and accounted for the bulk of global consumption growth during 2000–14.”
That means that:
Global Average annual metal prices are expected to decline 17 percent in 2015, largely on account of the decreases in the second half of 2014, and then fall slightly in 2016. Subsequently, prices are expected to broadly stabilize as markets rebalance, mainly from the supply side. The largest price decline in 2015 is expected for iron ore, which has seen the greatest increase in production capacity from Australia and Brazil.
The result, according to the IMF is that the turn in the commodity cycle is “exacerbating the long-anticipated decline in resource-related investment.”
But, it’s not all bad news with low interest rates – what the IMF calls “supportive monetary policy” – and a lower Aussie dollar set to underpin “non-resource” activity. That means that growth will gradually rise “in 2015–16 to about 3 percent.”