Mecardo Analysis - Chinese GDP – what does it tell us about wool prices?
- By: "Farm Tender" News
- Ag Tech News
- Mar 14, 2019
- 429 views
- Share
By Andrew Woods | Source: AWEX, OECD.
This article is bought to you by Macarthur Stockfeed and Rural Supplies.
This article is bought to you by Macarthur Stockfeed and Rural Supplies.
Traditionally economic growth in the cold, rich countries of the northern hemisphere has been a key driving force behind wool prices. This has changed with the movement of processing en mass to China, the reported development of the Chinese domestic market for wool and the decline in wool production. This article looks at the recent relationship between wool price and GDP.
China is the key processing region for wool as well as being the key destination for Australian exports. Accordingly, China economic data is covered widely in the media. As the Chinese economy has grown in recent decades it's natural rate of economic growth has fallen, which poses some problems for comparing wool prices with Chinese economic growth.
Ad - Macarthur Stockfeed and Rural Supplies covering all the Southern Sydney area - Ad
Ad - Macarthur Stockfeed and Rural Supplies covering all the Southern Sydney area - Ad
Figure 1 shows Chinese real (adjusted for inflation) economic growth from 2004, with a projection for next year, from the OECD (view here), which uses the left hand axis. Overlaid on Figure 1 is the yearly change in the Eastern Market Indicator (EMI) which refers to the right hand axis. The strong declining trend in the Chinese GDP growth rate (a function of the development of the Chinese economy) removes a lot of any meaningful correlation to wool prices. Keep in mind that GDP as a simple measure of a big, complex economy is going to fail in many ways. Logic tells us that economic conditions in China are important to wool, for example through the relationship between economic conditions and domestic wool consumption or through the access to credit for trading firms. This is where a single GDP number cannot deliver subtle and complex information to inform about these factors.
What about beyond China? In the 1980s the rule of thumb was that OECD economic growth above 3% was sufficient to lift wool prices. Figure 2 compares the change in the European real GDP with the change in the EMI from 2004 onwards. The two series do have a reasonable correlation, which makes some sense as Europe has quite a few cold, rich countries which consume wool. However, the year to year changes in GDP and EMI have plenty of variation between them. It is the same problem as with the Chinese GDP, in that the European GDP number is a coarse measure of economic activity pertaining to retail wool demand.
Key points
* Gross domestic product (GDP) is a coarse measure of economic activity and has a loose relationship at best to greasy wool prices.
* Chinese GDP data is further blurred; it’s the changing “natural” level as the economy grows and develops.
* The European GDP data has a reasonable correlation with changes in the EMI, reflecting a major market for wool in the cold, rich nations of Europe.
Ad - Macarthur Stockfeed and Rural Supplies covering all the Southern Sydney area - Ad
Ad - Macarthur Stockfeed and Rural Supplies covering all the Southern Sydney area - Ad
What does this mean?
GDP measures are a rough estimate of economic activity from the perspective of looking at how retail demand for wool is travelling or is likely to travel. This is especially so for the Chinese GDP data. Analysts and traders rely on a combination of other measures as well as surveys and direct feedback from contacts as to what the likely demand for wool is going to be in the major retail markets.
Share Ag News Via