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Mixed signals for global 2015 growth as US recovery gathers pace

Mixed signals for global 2015 growth as US recovery gathers pace

Photo by Bloomberg

6th November 2014

By: Simon Rees

Creamer Media Correspondent

  

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TORONTO (miningweekly.com) – The US recovery will continue to advance, supporting the uptake and price of several commodities into 2015, CIBC senior economist world markets Peter Buchanan told an audience at the mineLatinAmerica symposium on Tuesday. Even gold, which had come under price pressure over the past week, could expect a brighter outlook next year.

The general market jitters of mid-October had faded somewhat as evidence of the US’s recovery continued to build, Buchanan said. Gross domestic product (GDP) growth rates were positive in the third quarter, with an advanced estimate of 3.5% announced by the US Department of Commerce on October 30. This followed the second quarter’s robust 4.6% growth rate. In the future, the US could expect a rate of just below 3% for 2015 and 2.5% for 2016. 

An important facet of the recovery had been the uptick in auto sales, spurred by drivers replacing their aged vehicles. Buchanan predicted further buying in this regard, which would buoy the uptake of several metals and, with it, their prices. Meanwhile, pent-up demand for housing would help property purchases, also acting as a metals support.

The issue of when interest rates would rise was a keenly debated topic. CIBC predicted an increase would occur in 2015, potentially as early as the second quarter. “In addition, there’s also a lot of talk about what is called the ‘new neutral’, which is the equilibrium at which interest rates reach so they neither propel nor act as a drag on growth,” Buchanan said.  In this respect, the US peak interest rate was likely to be under the 4% mark, the previous peak level in past cycles.

Dovetailing into the developments on growth and interest rates had been the US Federal Reserve’s decision to end its bond-buying programme, more commonly known as quantitative easing. The impact of this was likely to be tempered by the Bank of Japan and the European Central Bank, which had announced steps to advance their own measures and to expand their balance sheets, Buchanan noted.

The eurozone’s growth levels were likely to be below 2% in both 2015 and 2016, he pointed out, adding that East European figures were decelerating, weighed on by Russia’s economic performance following sanctions imposed after its annexation of Crimea and its continuation of a proxy battle in eastern Ukraine.

China’s GDP growth rate remained strong, despite dipping to 7.3% for the third quarter, which was down slightly from the government’s objective of 7.5%, Buchanan noted. The “mini-stimulus” unveiled by Beijing in April had less effect than hoped for, although the government continued to liberalise the flow of finance into the mortgage sector, which could act as an economic fillip. Housing currently accounted for between 10% and 15% of GDP in China, he noted.

These and other stimulus measures were likely to boost China’s fourth-quarter growth figure up to the 7.5% target. The level was then set to slow to 7% in 2015 and to 6.8% in 2016. However, the decline obscured the incremental increase in China’s uptake of commodities, which, even at the lower growth levels, still represented twice the level of demand ten years ago, Buchanan noted.

Growth performance in Latin America had been mixed, with deceleration in several jurisdictions. Continent-wide, CIBC noted 2% growth, with Chile and Peru the strongest performers. Argentina and Venezuela would continue to face difficulties, including strong inflationary pressures.

Latin America’s largest economy, Brazil, had also witnessed deceleration and problems surrounding its deficit. The country recently announced its worst monthly figure in this regard since December 2001. Inflation was also problematic. “At almost 7%, it’s getting uncomfortably high and certainly puts some handcuffs on monetary policy,” Buchanan emphasised. The slide in iron-ore prices and the negative effect this had on returns compounded matters further.

FORECASTS

A major development over the past several months was the slide in oil prices, although Buchanan believed it was now oversold. In addition, the increase in Libyan output was unlikely to be sustained, while Saudi Arabia’s recent cut in prices was possibly a message for other Opec producers. “I don’t think they [the Saudis] are gunning for a war with the North American shale oil producers. I think their aim is to get other producers to cut back at the Opec meeting on November 27. So we foresee oil [eventually] picking up a bit," he said.

Zinc’s fortunes look positive, with London Metals Exchange inventories declining once more. Further support was likely from mine closures next year and an increase in uptake for galvanising purposes. “Almost half of zinc demand relates to galvanising and we expect to see support coming from US construction and the automotive sector, so we are looking at prices of $110/lb in 2015 and $125/lb the year after,” Buchanan stated.

The ban on nickel ore exports by Indonesia was expected to be felt into 2015. “We also had fairly strong demand from stainless steel producers in the first half of 2014 and we expect those forces to turn the situation around [again]. So we’re probably going to see $8/lb next year and somewhat stronger in 2016,” Buchanan said.

Copper had advanced back to $3/lb, while inventories appeared to have bottomed out. The upside for the red metal was likely to come on growing housing starts and the increase in electronics and auto sales. However, price pressure would come as further production came on stream and entered the market.

The decline in the gold price inversely reflected the advance of the US dollar, Buchanan noted. “But we think the dollar will overshoot. We then see it selling off somewhat, starting in the latter half of 2015 as growth starts picking up outside the US. This should help gold.

“Also we’re looking at further income wealth flows into countries like China and India. That should act as a support too. So we have a modest rebound to $1 300/oz for 2015 and somewhat stronger the year after,” he explained.

Edited by Creamer Media Reporter

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