MONTREAL – Risk of a further slowdown in the global economy is higher than ever, which could cause an implosion in commodity prices, says the chief economist of Export Development Canada.
But the agriculture sector will be exempt from that economic downturn, Peter Hall told delegates attending the 22nd annual convention of the Canadian Special Crops Association.
People who believe the U.S. economy will soon rebound, pulling the global economy along with it, have their head in the sand, said Hall.
Export Development Canada has calculated there are seven million excess new houses in the U.S. market, the equivalent of a good year’s worth of sales. Housing activity is a leading indicator of the health of the U.S. economy and with that big of a surplus, a turnaround is far from imminent.
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“I may be optimistic thinking that the U.S. economy could start to rebound in the middle of next year. It might be early 2010 before we see the economy coming back again,” Hall said in an interview following his presentation.
The world’s other major economies won’t be picking up the slack. The European Union is clearly showing signs of abatement and Japan is already in recession.
“You’ve got 60 percent of world GDP that is slowing appreciably.”
The risk for a further collapse is high because consumer confidence around the world is waning. Surveys show there is more pessimism in the U.S. today than in the 2001-03 period when there was a meltdown of the high tech sector, drastic interest rate cuts by the federal reserve and the Sept. 11, 2001, terrorist attacks.
“You can hardly imagine consumers being more pessimistic than that,” said Hall.
But they are.
“We’ve got a level of confidence in the U.S. that rivals any big recession that we’ve had in the last couple of generations.”
For the first time in about five years, world economic growth is forecast to be below four percent for 2008 and 2009 and Hall thinks it could fall as low as three percent.
He said the slumping world economy will drive down commodity prices because consumers can’t afford them. Hall is forecasting oil will drop below $100 per barrel by the end of the year from today’s level of $145 when speculators finally come to their senses.
“Bubbles are very fragile things and when they burst they disappear. They don’t deflate, they implode.”
A similar case can be made for base metals.
One commodity category that will be insulated from the downturn is agriculture because of what Hall termed, “the tale of two consumers.”
Consumers in developed countries are reducing their purchases. U.S. consumers are expected to devote $200 billion to savings in 2008, much of which would have been spent.
By contrast, consumers in emerging economies have significantly more buying power and much of that is being spent on more and better quality food.
China’s middle class is growing at 35 million people per year, which is the size of Canada’s entire population. India is adding another 20 million people per year to its middle class.
“It puts the agrifood industry around the world in a real sweet spot,” said Hall.
“There are some speculative forces (in agriculture) but there is a heck of a lot of fundamental demand that is developing right now and that’s not going to go away.”
Agriculture can expect to see its commodity prices stay high until there is an appropriate supply response and that won’t be soon because of the limited availability of arable land, he said.
