Why we must hope for a significant fall in the prices

Oil prices are still some 40pc higher than the average of the year higher than the average in 2009 Photo last and 80pc: Reuters

And falls took place in all categories of products of precious metals to foodstuffs and industrial metals. This could be the start of something grand?

If this is the case, things have developed a long way from here. Oil prices are still some 40pc higher than average and 80pc superior to the average of the last year in 2009. It is a similar story with soft commodities. Wheat is still 30pc above the average of the last year. However, Mao-Tse-Tung is supposed to have said: "the journey of a thousand miles begins with one step". (Note, it is the journey of a single step.)

If commodity prices fall a long way, it should not be surprising that. In fact, I have been waiting for this for some time. The fundamental reason why they weaken now is evidence of more growth in the global economy, accompanied by a mini revival of the dollar.

Here, of course, we had figures of GDP and consumption low but also low surveys PMI manufacturing and services sector. Interestingly, the United States also, although Friday employment figures are OK, also recently on some soft numbers. Meanwhile, the Japan is put down by the results of the recent disaster and in the euro area, there are early signs of a slowdown.

Why the recovery of the world should have started to slow? I think that the most likely explanation is very the price increase of oil and raw materials which now seems to be reversing. In most of the world, higher prices have significantly reduced the real income of consumers and the increase in business costs.

Again, changes in the health of the global economy may be not history. There was a controversy raged on the extent to which speculation has played a role in the conduct of the prices of raw materials. At least, it should be obvious that speculation can have an enormous impact on short periods of time.

Last week, the price of oil fell 10pc. Are we to assume that the application of the world economy has fallen from enough in a week to produce a drop of this magnitude? Of course, it is absurd. What happened is seen that merchants on what has happened, and may still occur, the world demand have changed. But if a change of view (speculation) may affect undoubtedly price, short term, then, why could not touch on longer periods of time?

It can in theory. The argument against this having played an important role in practice, it is that the speculators will have to be prepared and able to build stocks (inventories). Yet there was supposedly no visible evidence of accumulation of stocks of raw materials.

This argument has always struck me as grossly exaggerated. Of course, there is to be increased to hold inventory preparation. But this must not result in an increase in stocks in the practice of. The price can take the strain, combustion thus off the coast of the willingness to hold more shares.

This is not a point on the particular characteristics of the basic products. It is a fundamental point of the economy. It is based on the distinction between ex ante and ex post the application. When the report of the stock exchange, says that the price of the shares in BP rose due to increased demand for them, we do not expect to see this reflected in an increase in the number of shares in question. Expect to see it reflected in a price above separately. It is therefore with commodities.

What are the implications? If all the recent weakness in prices of raw materials is a reflection of the emerging weakness of the global economy, which is hardly cause for celebration. After all, although there would be benefits from the growth of real incomes, if the global economy were slower then it would be bad news - especially for our exports.

And exports are our great hope for recovery. What we would gain on the swings we would lose on the roundabouts. And roundabouts could easily be more important than the swings. If a good case, speculation has contributed to the recent resistance of these awards, however, then there is scope for the price of materials first to fall to a point that is higher than what is justified by a global economic slowdown.

The future is full of surprises. If I had to make an idea of how the next few years could much better than most analysts (including me) are forecast, my main candidate would be a significant decline in the prices of materials first out of all proportion with any weakness in the global economy.

If that happens, we would see a dramatic drop in inflation and a net recovery of real income of consumers. That would help people to absorb the effects of the tax reduction. It is certainly something to hope for. And it may just happen.

Roger Bootle is Director General of the capital economy and economic adviser to the Deloitte

Roger.Bootle@capitaleconomics.com

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