Three questions about world economic growth and ag markets

Ever wonder about how world economic growth impacts agricultural markets?

You probably do – or should - because what happens far away impacts what happens here at home. So, in anticipation of the International Monetary Fund (IMF)’s updated growth projections for 2014 and 2015 (October 7 release), I’m answering three common questions about the global-local relationship.

1.    Emerging markets have seen some impressive growth in the last few years. Will forecasts of the growth rate in their Gross Domestic Product (GDP) be revised downward?

The short answer? Yes. The question is to what extent.

This isn’t necessarily good news: demand for agricultural products relies heavily on the expansion of the purchasing power of the middle class in developing countries. But it’s not necessarily bad news either. Consumer expenditures and disposable income are more important for agriculture demand, not overall GDP.

Take China for example, whose 2015 GDP forecast will possibly be lowered. But Chinese consumers’ income is likely still projected to grow - and that’s what really matters.

2.    The crisis in Ukraine is ongoing. What are its projected impacts?

The outlook for Russian growth in 2015 is likely to be around zero given international sanctions. But the Russian ban on food imports has had minimal disruptions here in Canada thanks to the successful search for other pork and seafood markets. Moreover, with soft and declining grain prices, Russian authorities aren’t likely to implement the export restrictions on wheat and other crops that would further disrupt the world market.  

3.    What are the key downside risks to the world economy?

The continued economic slowdown in Europe is one of the biggest risks the IMF is likely to focus on. More generally, expect the IMF world economic outlook to emphasize geopolitical risks.

Oil prices have fallen since early summer.  As U.S. oil production is booming, demand from Europe and emerging markets has softened. With a number of countries having cut oil production, the risk of global conflicts driving oil prices higher appears low.  

Overall, we expect a dimmer outlook for the world economy – which will not necessarily lead to a further slowdown in agricultural markets. Lower grains and oilseed prices can still generate additional demand, which will in turn sustain prices above the recent lows. 

Got a question about global economic growth? World markets? Let us know and we’ll answer it in upcoming blog posts.

J.P. Gervais, Chief Agricultural Economist