The commodities super-cycle as used here refers to the general pattern in commodity prices in terms of ebbs and flows over time. This cyclical trend in commodity prices has been observed by economists for some time now and certainly since the midnineteenth century. The current cycle started around 1999 and peaked in 2008. Its post-global financial crisis (GFC) peak was observed between 2011 and 2012. This was followed by a general downswing. In October 2015, prices are much lower than and are even comparable to those immediately following the global financial crisis. The more gradual decline in prices in 2015, as compared to 2009, may be signalling that the cycle may be coming to an end. There are a number of reasons why the commodity super-cycle is coming to an end. Prime amongst these is that the rapid growth of China has started to wane and so this strong demand pull on commodity prices has decreased.
In particular, the Chinese economy has started to make a determined step away from an export oriented growth strategy to one that is founded on consumption led growth. Indeed, the objective of China’s leaders as indicated in its twelfth five-year plan, is to implement economic reforms so as to reorient growth to make it more sustainable, even if it means that growth will be slower than that attained in the previous decade. There may be some challenges experienced in the reform process, as some of the reforms could generate unexpected outcomes in the economy. Additionally, OPEC may have made a judgemental error in expecting the USA to respond to low prices by cutting production. Indeed, the opposite has occurred and with the fall in oil prices, the world supply has been increasing, motivated in part by growing production from the USA.
As supply increased, in parallel, there was a softening of demand. In addition to China, several other major countries experienced slowing economic growth and also the world itself has become more energy efficient. Global economic growth appears to be moderate in 2015 at 3.5%. There are uneven prospects across the main countries and regions. In advanced economies, growth is improving, while, according to the IMF, growth in emerging and developing economies is lower than expected, which is due to weak commodity prices. This is significant since developing countries were the engine of global economic growth in the aftermath of the 2009 global financial crisis.
A lower price of oil has also in part been motivated by a stronger US dollar.
Furthermore, the United States (US) Federal Reserve has kept interest rates low, since the 2008 economic recession. This suppression of the interest rate was done to stimulate economic growth in the US. However, as the recessionary effects in the US are over, the Fed is expected to raise interest rates. The potential interest rate hike by the Fed, would further weaken the demand for commodities. This is attributed to higher interest rates which should increase the cost of borrowing and reduce consumption. Subsequently, reduced consumption would place even further pressure to weaken the prices of commodities.
Implications of the End of the Super-cycle for TT
The end of the commodity supercycle provides yet another indication that the Trinidad and Tobago Government needs to diversify its economy, as an important subset of the commodities we export are subjected to fluctuations of a pronounced degree in the global market. To dampen the effect of this volatility on the macroeconomic output of the economy, a wider production platform is needed. If attempts to broaden the production base are unsuccessful or progress too slowly, then this economy can drift towards the border of a failed state. Indeed, if one were to look at the secularly stagnant state of the Trinidad & Tobago economy, one may be forgiven for thinking that we are already there.