Material difficulties: Falling commodity prices and emerging-market equities are bad omens for the world economy (The Economist – August 1, 2015)

FIVE years ago, two views were fairly common. The future belonged not to the sluggish, ageing advanced economies but to the emerging markets. Furthermore, those economies had such demand for raw materials that a “commodity supercycle” was well under way and would last for years.

Commodity prices peaked in 2011, and have been heading remorselessly downwards ever since. Their decline of more than 40% so far is a huge bear market; had it happened in equities, the talk would be of calamity and collapse.

News coverage in the Western media tends to view the decline in commodity prices as a benign phenomenon, as indeed it is for countries that are net importers. But it is not good for commodity exporters, many of which are emerging markets.

That helps explain why emerging-market equities have had only one positive year since 2011, and have underperformed their rich-country counterparts by a significant margin in recent years (see chart). The latest sign of trouble came in China, where the Shanghai Composite fell by 8.5% on July 27th.

The growth rate of emerging economies is likely to slow in 2015 for the fifth consecutive year, according to the IMF. Of the BRICs, Brazil and Russia will see their output decline this year, while China is slowing. Only the Indian economy is set to accelerate. Developing economies were boosted in the first decade of the 21st century by the rapid expansion of Chinese demand, as the world’s most populous country underwent an investment boom.

This was good news for commodity exporters; China comprises almost half of global demand for industrial metals. But the fall in commodity prices indicates that Chinese demand has slowed in recent years. It also shows that high prices did their job, by bringing forth new sources of supply, such as shale oil and gas.

At the same time, China has shifted its manufacturing industry from the assembly of components made abroad to the creation of finished products from scratch. This has hit other Asian economies. Emerging-market exports are down 14% over the past year in dollar terms.

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