IMF: Global Economic Outlook ‘Pretty Grim’

Ian Talley:

The International Monetary Fund said Tuesday that it expects prices of oil and other commodities to decline this year and next on the back of a weak global economic outlook, but warned that “sizable” threats to world growth could force a further fall.

The IMF also said a sudden shortage of crude-oil supplies would send prices upward, “but the ensuing slowdown in global growth could lead to a decline in the prices of other commodities.”

“The global outlook…is pretty grim still,” said senior IMF economist Rupa Duttagupta.

Although recent efforts by Europe to solve its debt crisis have bought temporary respite, economists have warned that it could be about to enter a new phase if the euro zone’s fourth-largest economy–Spain–needs a bailout. Also, there are signs that expansion in emerging markets, which have been the primary source of global growth and commodity price pressure during the recovery, may be cooling.

The IMF’s assessment, reported in a chapter of the fund’s annual World Economic Outlook, came as tensions simmer between major oil exporter Iran and Western nations seeking to halt Tehran’s alleged nuclear-weapons program. Iran has threatened to shut the Strait of Hormuz, a supply route through which travels roughly one-fifth of the world’s oil. Furthermore, analysts have warned that a military campaign against Iran could disrupt Iranian exports as well as supply from nearby producers such as Saudi Arabia. The IMF’s full economic outlook is due to be published next week.

Fund staff said the weak global economic outlook suggested that commodity prices are unlikely to increase at the pace of the past decade, with commodity prices forecast to “decline somewhat” through 2013.

“Sizable downside risks to global growth also pose risks of further downward adjustment in commodity prices,” the fund said. Duttagupta declined to provide details on the expected decline ahead of the full report’s release. But she said the fund’s January assessment, which forecast a 5% fall in oil prices in 2012 and a 3.6% decline next year, would be adjusted to reflect the IMF’s new economic outlook.

Although a sudden price rise could ultimately lower commodity prices as global growth wilted, it could devastate poor countries. If oil prices rose by nearly 50%, one IMF scenario suggested that 31 million people could be pushed into poverty. “A further increase in commodity prices could have severe macroeconomic and social consequences,” axing the trade balances of low-income countries by around 3% of gross domestic product, the fund warned.

Over the longer term, commodity prices may be experiencing a long upswing and could stay close to current historic highs, the IMF said.

Commodity exporters, whose economies are exposed to the whims of volatile prices, should take advantage of the current high-price environment to build economic buffers against the risk of falling prices, however. The fund cautioned that the cost of commodities in the long term may, instead, retreat in response to more-efficient use by consumers and the opening up of earlier supply constraints.

 None of us are strangers to increasing gas prices.  It seems that ever since the time we got our licenses, prices have done nothing but go up.  One particular statement in the article (the one in bold) stood out to me.  We have seen prices rise steadily in the past, but exactly how quick would prices shoot up if things really started heating up in the Middle East (even more so than now)?  And would a drastic increase like this push the US to becoming more energy independent?