The writer is global head of commodities research at Goldman Sachs
It is tempting to blame today’s shortages in the “old economy” — everything from energy to other basic materials, and even agriculture — on a series of temporary disruptions driven largely by the Covid-19 pandemic.
But outside of a few labour issues, these bottlenecks have little to do with Covid. Instead, the roots of today’s commodity crunch can be traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment in the old economy.
As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods. After years of neglect, today’s rising gas prices, copper supply shortfalls and China’s struggles with power generation are the “old economy’s revenge”.
In the economic stagnation following 2008, policymakers focused recovery efforts via central bank quantitative easing programmes to support markets. Lower-income households faced sluggish real wage growth, economic insecurity, tighter credit limits and increasingly unaffordable assets. Higher-income households, on the other hand, benefited from the financial asset inflation caused by QE.
This disparity in outcomes hit the old economy hard. In the old economy, price appreciation results when the volume of demand outstrips the volume of supply. Higher-income households may control the dollars, but lower-income households control the volume of commodity demand given their greater number and propensity to consume physical goods over services.
As the volume of demand for commodities waned, so did the returns for old economy sectors. Lower returns led to less long-cycle old economy capital expenditure — which traditionally requires a five to 10-year horizon of sufficient demand — in favour of short-cycle “new economy” in investment in areas such as technology.
By 2013, this weakness backed up into China. As the world’s manufacturing engine slowed and commodities began their historic slide, the old economy’s capital flight intensified.
Indeed, the old economy was overbuilt, debt-laden and over-polluted. While the old economy only represents about 35 per cent of global gross domestic product, it generated at least 2 times the corporate losses, had about 90 per cent of the non-financial debt and created 80 per cent of the emissions. It is no wonder why investors preferred Big Tech to oil and copper.
After the oil price collapsed in 2015, markets were fed up with wealth destruction, nearly halting deal flows across the old economy. China stopped aggressively stimulating lossmaking enterprises such as coal mines. And as climate change became top of mind, investors put greater weight on environmental, social and governance issues, further restricting capital.
The resulting decline in investment prevented capacity growth in commodities. This has been particularly the case in hydrocarbons where divestiture by investors for ESG reasons compounded an already growing under-investment problem.
The severity of these supply constraints has been underlined as countries have moved into recovery mode from the pandemic, exposing just how stretched the old economy has become.
The pandemic also had a further effect, placing social needs more at the centre of policymakers’ agendas. Such inclusive growth has only accentuated the demand for physical commodities.
Shocks to one part of the system are now creating ripple effects elsewhere. Reduced coal output in China hit aluminium smelting capacity, creating shortages in aluminium. Reduced gas availability forced gas-to-oil substitution, generating shortages in oil. The rolling impact of smaller, frequent shocks on a stretched system generates the emergent phenomenon in which transitory shocks lead to persistent physical price inflation — the start of which we are seeing today.
This is where the revenge of the old economy will leave its mark. Periods of commodity price pressure will reoccur as broad-based demand meets inadequate infrastructure.
If policymakers’ goals of broad-based prosperity and a massive buildout in green infrastructure are to be met, commodity prices will need to significantly overshoot to the upside to provide the incentive for investment. This is needed to compensate for the growing risks involved in long-cycle capex projects and the inherent complexities surrounding the green energy transition. As we argued a year ago, a new commodity supercycle is upon us.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
