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| Falling commodity prices bad news for everyone: Roubini | | | Indian macros are increasing
looking better than what they did a
while back, mainly on account of cool off in global commodity prices. However, Nouriel Roubini of Roubini Global Economics says though it will benefit us in the short-term, in the long run, it will be bad news for India as well.
"While fall in commodity prices benefit commodity importing countries, (like India) if the reason why commodity prices are falling is that markets now, forward looking, are pricing in softer global economic growth, then that is going to be bad news for India. It is going to be bad news for Asia and for global economy," he told CNBC-TV18 in an exclusive interview.
Below is an edited transcript of the interview on CNBC-TV18.
Q: In the last eight weeks, what has really churned the global scene or asset markets seems to be the very steep fall in commodities. What does this look like? Is it an end to the super cycle that we saw from 2001 to 2012? Is this the end of financialisation of commodities? What exactly are we going through? Is it temporary or is it that commodities won't get back to the pre-2012 levels?
A: The falling commodity prices, while being beneficial to countries like India and others that are net energy and commodity importers, may actually be signals of weaknesses in the global economy.
What has happed for the last few weeks is that most of the macro economic news has been actually quite negative and surprising on the downside. First of all, the Eurozone peripheral recession is now bottoming out and now this recession is spreading even to the core of the Eurozone. France and even the latest data from Germany forward looking indicator of manufacturing have been weak.
Secondly, the US now is slowing down. The effects of increasing taxes and the sequestration of spending is now having a negative impact on economic growth -- slower consumption growth, slower private sector growth and the fiscal austerity is going to have a negative effect on growth.
Now, even the data coming from China, the second largest economy of the world, suggests that in spite of another round of credit fueled investment, the growth of China might be slowing down. Both first quarter growth numbers and now the forward looking indicator like the purchasing managers' index (PMI) suggest the softness of China.
So in that sense, if the fall in commodity prices is caused by a growth scare, and if it is not just a growth scare but we are going to see economic weakness in Europe, in the US, in UK and now even in China, that is going to be bad news. While fall in commodity prices benefit commodity importing countries, if the reason why commodity prices are falling is that markets now forward looking are pricing in softer global economic growth, then that is going to be bad news for India. It is going to be bad news for Asia and for global economy. So it is a mixed bag.
Q: Just a word more on the financialisation of commodities as an asset class. One reason why commodities did not fall, in the period from 2008 to 2012, despite very big recessionary trends was because central banks went on printing money or at least the US Fed did. The US has not stopped printing money -- USD 85 billion is coming in every month. Another big economy has joined the bandwagon. Now logically if there is so much money getting printed then at least gold should not fall so much and yet we see gold becoming the worst causality of the commodity fall.
A: The reason why commodity prices are falling inspite of easy money is because right now there is a growth scare.
That growth scare might be more than a scare.
It might be something more substantial. The reason why central banks keep on printing money is because they worry about downside risk to economic growth.
Now, within the commodity space, of course there are also precious metals and gold in particular. In my view, the reasons why gold is falling in price are several. First of all the risk of another global financial meltdown has been receded. The tail risk, for example, of a breakup of the Eurozone is lower. Usually, gold tends to do well when you have a risk of a global financial meltdown. That is the time of buying gold canned good and running to your log cabin in the mountains if you are really worried about another global financial crisis. That risk successfully has been reduced in Europe and the rest of the world.
The second reason why gold could go higher is because there could be a scare about global inflation but the reality is inspite of very easy monetary policy in the US, in Japan, even in other central banks in advanced economies, the reason why they are printing more money is exactly because growth is so weak. Weak growth is associated we have a deflationary, if not these disinflationary pressures. So inspite of a rise in liquidity there is no inflation. If anything, these growth concerns imply disinflationary pressures and therefore holding gold because of worries about hedge against inflation is going away.
This increase in liquidity has now restored economic growth both in advanced economies and emerging markets and there are other riskier assets that can give you a greater return than gold like US and global equities. For example, gold doesn’t have any income -- doesn’t pay coupon, doesn’t give you dividend like equities. It is only based on having a capital gain if gold prices go higher. While equities provide you potentially both a capital gain and dividend; bond can give you a capital gain if the price rises and they give you an income in terms of a coupon.
So in some sense actually the fall in price of gold is a good signal because it says that inspite of the recent concern about the global economic growth, there is a global economic recovery and there are other real assets like good corporations in advance economies and emerging markets, good bonds in advance economies and emerging markets, real estate and some commodities that can give you a higher return. |
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