by Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI
In sharp contrast with the Wall Street consensus last July that global growth would accelerate, ECRI was warning of an impending global slowdown. Accordingly, growth in the Journal of Commerce (JoC)-ECRI Industrial Price Index (IPI)* peaked in July (Chart 1), before starting its sharp decline.
By the fall Wall Street became wise to the downturn in energy prices in particular, focusing on supply concerns. However, the decline in IPI growth to a 70-month low early this year makes it clear that a broad industrial downturn was underway, hurting the prices of many other industrial commodities, including primary metals.
ECRI’s prescient prediction was based on our 20-country Long Leading Index (Chart 2, top line) that had already turned down by last summer, with the 20-Country Coincident Index (bottom line) also beginning to weaken.
Today, the welcome news is that the long leading index has turned up, and the coincident index is starting to follow suit, with the revival being led by economies where exchange rate weakness is acting as a tailwind (Japan and the Eurozone), while being less evident in the U.S. where dollar strength is a headwind.
This cycle in global growth provides the backdrop for the current upturn in IPI growth, which is now at a five-month high (Chart 1). Again, this cyclical upswing is not just about oil, and is far more broadbased.
Stepping back, when there is too much focus on the supply of a single commodity like oil, or on any specific country, one is apt to miss the big picture described here. This is a widening international upturn affecting the demand dynamics of a wide range of commodities, across many borders, not about the minutiae of the shifting supplies of a given commodity.
*The IPI is a broad based measure of sensitive industrial material prices, half of which are not exchange-traded. As such, a broad based move in the IPI is apt to reflect cyclical fundamentals, rather than speculative forces.