LONDON — The world is still waiting for the global commodity price to come back down to $50 per tonne.
But as the commodities hub of Asia, the United States and Europe has started to recover from the first major rally in six years, some economists have already predicted that the market’s current plunge could end up as the weakest in the past century.
Australia’s benchmark crude futures fell over 4% in Sydney and is now down over 3.6% in Melbourne.
Prices for Brent crude, which is cheaper than crude itself, fell over 2.5% and futures for US Brent fell 2.6%.
“We’re still in a fairly severe price correction and the commodity price recovery is starting to accelerate,” said Mark McAllister, head of commodity strategy at Bank of America Merrill Lynch.
“There are a lot of people out there saying that if you can’t sell your oil in the market, you better not buy anything in it.”
The US Federal Reserve has been raising interest rates for the last two weeks and the Bank of England has also started to loosen monetary policy.
The commodity price collapse, if it does come to pass, will be a blow to the global economy.
It will also have a major impact on consumer spending, which accounts for around 80% of the economy.
The Federal Reserve raised its benchmark interest rate to a record low of 0.25% on Thursday, which it will keep at for at least another month.
But the price of oil has dropped almost 50% in the last year and has dropped to below $40 a barrel.
Oil, in turn, has been on a slide as demand for goods has dropped, so people have stopped buying cars and other goods.
As a result, Australian manufacturing and construction are slowing and demand for energy has also fallen.
In contrast, US manufacturing and real estate are booming and demand is on the rise.
This means that the economy has also been able to expand more rapidly than usual and that the unemployment rate has gone down, which will add to the confidence in the Australian economy.
“We are really enjoying this rebound,” Mr McAllisters told ABC Radio on Thursday.
A few economists said that even if the US oil price crash does not last for a while, it could still lead to a stronger economic recovery in the US.
One of them, Michael Hsieh of Capital Economics, said that while he believed the current price crash would be short-lived, it was possible that it could turn into a rebound if it did end.
However, if that does not happen, he warned that if the economy continued to slow, then there would be a “big correction” in the global economic outlook.
And if that correction does not occur, it would mean a sharp rise in inflation, with inflation potentially hitting 2.8%.
“That’s not good,” he said.
Australian Reserve Bank chief Mike Quigley said that there were still risks to the Australian economic recovery, especially given the weakness of global economic conditions.
If the price drop does not come to an end soon, then the economy will likely start to contract a bit more, he said, adding that this could cause a sharp fall in GDP growth.
Mr Quigleys forecast that the Australian dollar will be in a strong position against the US dollar, but this could be because the Australian currency is trading against the euro and the Australian Government is willing to tolerate higher interest rates to allow the economy to grow.
So he said the Australian Federal Budget was likely to be “in a better position to respond to the oil price drop than the Federal Budget is”.
“The Reserve Bank and the Treasurer will probably be forced to make some cuts in interest rates,” he told ABC radio.
‘It’s not just a one-off’The Reserve Board has said that its outlook for the Australian housing market is positive and the unemployment level is expected to remain below 10% for the next few years.
That is a significant improvement from its February outlook of “negative” for the US housing market and the December outlook of 8.4% for Australia.
Although unemployment has risen in recent weeks, Mr Quighes said that it was still too early to tell if this was a “one-off” or an ongoing trend.
He said that if it continues to be a big drag on the economy, then it would also affect household spending, with people taking out loans to buy houses.
On top of that, he also said that the impact of the global financial crisis could have a “chilling effect” on the Australian property market.
“That is going to create a lot more stress on the housing market, particularly in Sydney,” he explained.
For more business news, visit ABC News Australia.
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