The world is transfixed by the political bickering in Europe while commodity prices – a far more important issue for Canadian investors – endure a severe beating.
The West Texas intermediate crude price has dropped more than 13 per cent since early May and copper has dropped 11 per cent during the same period. The clear culprit for weaker resource prices is a serious decline in Chinese economic activity that has pulled the global growth outlook lower.
The first chart, below, highlights the close relationship between economic growth expectations and commodity prices. For the two years that estimates on 2015 global GDP growth have been available, the Bloomberg commodity index has consistently followed their path.
The most obvious example occurred during March of this year. Economists raised forecasts from 2.74 per cent to 2.9 per cent and the commodity index rallied 5 per cent in the following two months. The optimism, however, proved unfounded and growth estimates began moving lower. The last available reading on the 2015 GDP forecast was 2.8 per cent on June 10. By that time, the trend was firmly established – both growth expectations and commodity prices were headed lower.
To make matters worse for Canadian investors, the economic slowdown is particularly acute in the Chinese economy. China's massive infrastructure build-out over the past two decades has made it the largest source of demand for virtually any commodity you can name.
China's gross domestic product growth is expected to come in at 7 per cent in 2015, which sounds healthy compared with the 2.8 per cent growth forecast for the global economy. However, there are signs of a much more severe decline in economic activity under the surface.
The second, lower chart highlights a contraction in Chinese imports that has accompanied the year-over-year decline in commodity prices. From July, 2010, to July, 2014, Chinese imports grew at an extraordinarily strong average of 14.4 per cent. Since that time, however, the average year-over-year change in imports has averaged an 8.7-per-cent decline. The weakness in imports has actually intensified in 2015. To date, year-over-year imports have fallen at an alarming 17.3-per-cent rate.
The index shown measures the value of Chinese imports in currency terms so, to some extent, falling commodity prices causes the index to decline. In other words, the index would fall if China were importing the same amount of resources at lower commodity prices. But, a quick check of the data (not shown) reveals that the volume of Chinese commodity imports is also falling. The volume of crude-oil imports is lower by 10.9 per cent and copper imports are 5.8 per cent lower than a year ago.
China's gross domestic product is more than 50 times larger than Greece's economy. For Canadian investors, and indeed almost all global investors, the decision of whether to follow developments in Europe, or the Chinese government's desperate attempts to stem the bleeding in the Shanghai composite equity benchmark, should be an easy one.