The Unassuming Economist

“The Norwegian housing market was only moderately affected by the global financial crisis, and the rising trend of house prices resumed shortly after the crisis. In the meantime, household debt reached more than 200 percent of disposable income, and it is expected to grow further”, a new IMF paper examines the characteristics of household debt and the factors driving the housing boom and debt accumulation. The paper also examines the potential macroeconomic impact of a possible house price correction. Read the report here.

By IMF colleagues: Rabah Arezki and Akito Matsumoto

“It was the best of times, it was the worst of times.” With these words Charles Dickens opens his novel “A Tale of Two Cities”. Winners and losers in a “tale of two commodities” may one day look back with similar reflections, as prices of metals and oil have seen some seismic shifts in recent weeks, months and years.

This blog seeks to explain how demand — but also supply and financial market conditions — are affecting metals prices. We will show some contrast with oil, where supply is the major factor. Stay tuned for a deeper analysis of the trends in a special commodities feature, which will be included in next month’s World Economic Outlook.

Metals matter

Base metals — such as iron ore, copper, aluminum and nickel — are the lifeblood of global industrial production and construction. Shaped by shifts in supply and demand, they are a valuable weathervane of change in the world economy.

There is no doubt about the direction of the prevailing wind for metals in recent years. Prices have been gradually declining since 2011 (chart 1). While oil prices have also dropped, the decline is more recent (prices peaked in 2014), and more abrupt. That said, in both cases the downward pressure on prices result broadly from abundant production from the era of high prices. This is now coming to roost with lower demand from both emerging markets and advanced economies. There are importance nuances however in the relative strength and nature of those forces.

Appetite for production

In the early 2000s, demand for metals shifted from advanced economies in the West to emerging markets in the East. China, by far the main driving force, now accounts for half of global base metal consumption (chart 2). Compare that with China’s more modest consumption of 14% of the world’s oil which is almost exclusively used for transportation.

It is therefore no surprise that metals prices are heavily influenced by demand, and the needs of one economic giant in particular. India, Russia and South Korea have also increased their metal consumption, but remain far behind China. The slower pace of investment in China in the last few years, however, compounded by concerns over future demand amid the sharp stock market decline and currency devaluation this summer, have been exerting downward pressure on metal prices.

Oil supply glut

Oil prices tell a different tale. Our view is that supply factors are playing a bigger role than demand. See also our blog from last December. OPEC’s decision to maintain its level of production and strong shale oil production in the United States — in addition to the large production capacity from earlier investment — have contributed to an unprecedented supply glut.

The IMF’s report on the Philippines points out the macroprudential policies that have been implemented. The report says: “In light of the acceleration in credit growth in 2014 and risks of domestic asset price booms, the BSP [Central Bank of Philippines] conducted stress tests on banks’ real estate loan exposures and required corrective actions, enhanced monitoring of banks’ exposures to all types of real estate, and provided guidance on real estate mortgage loans, setting their maximum loan value at 60 percent of the appraised value. These measures have helped to restrain credit growth to the real estate sector. Single borrower limits (set at 25 percent of core capital) should be strictly enforced with the additional 25 percent allowance for exposures to PPPs allowed to lapse.”

The unemployment rate in Norway is one of the lowest among OECD countries. At the same time, according to an IMF report, absence from work due to sickness “is the highest among the OECD countries, and so is expenditure on health related benefits, which is more than 5 percent of GDP. About one-fifth of the working age population receives income supports related to health problems or disability, which is nearly everybody who is not working. Disability benefit recipients are thus sometimes considered as “disguised” unemployment or early retirement in Norway. This is not surprising; there is an inverse relationship among European countries between the unemployment rates and the disability benefit recipient rates; economies with low unemployment often have high disability rates, suggesting that the two forms of labor market insurance tend to be used as substitutes.”

“Norway’s half century of good fortune from its oil and gas wealth may have peaked,” according to an IMF report. “Oil and gas production will continue for many decades on current projections, but output and investment have flattened out, and the spillovers from the offshore oil and gas production to the mainland economy may have turned from positive to negative. Thus far, economic policy has needed to focus on managing the windfall, and Norway’s institutions have been a model for other countries. Going forward, the challenges will become more complex. The problems of managing “Dutch disease” are not gone, but they will abate, particularly if the recent drop in oil prices is sustained. However, they will be replaced by the difficulties of managing a transition away from what has been an increasingly oil- and gas-dependent mainland economy.”