What is going on with commodities?

Pendal Group

Pendal Group

The renewed weakness of commodity prices was taken by some as a sign that global economic growth may be faltering dramatically. It shouldn’t surprise that there is a strong link between commodity prices and global GDP growth, as shown in the left chart. Importantly, however, there is no evidence in the chart that commodity prices lead global growth; no evidence that they warn when a recession is coming. The real doomsayers may concede this, but then argue that the commodity price information is instantaneous and the other indicators just haven’t caught up yet. But we have a wide range of real-time indicators these days, and none is suggesting that the world economy is teetering on the brink. What then is going on with commodities? Well the relative weakness of the Chinese economy is probably playing a role; for many commodities (eg iron ore, aluminium, nickel and steel), China represents half or more of the global market. The below chart on the right shows the very close link between an index of Chinese manufacturing and the price of copper. (VIEW LINK)

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