A post in March signalled a slowdown in emerging economies that would relieve upward pressure on commodity prices. This slowdown is well under way – combined industrial output in seven large emerging economies (the “E7”) rose by only 1% in the six months to July versus a 7% gain in the prior half-year.

Commodity prices, meanwhile, have softened – the Journal of Commerce index of 18 industrial raw material prices is currently 7% below its level at end-March. The tight correlation between changes in E7 industrial output and commodity prices described in the earlier post has persisted.

The forecast of slower growth was based on real money trends and a leading indicator derived from the OECD’s country leading indices. Both remain soft but suggest that economic weakness will abate. Commodity prices, therefore, may stabilise or revive in late 2011, although a return to earlier strength is not yet signalled.

E7 six-month real narrow money growth has revived from a low in May but remains historically weak. The increase partly reflects a slowdown in inflation that should extend into late 2011 as food and energy price pressures abate. Lower inflation, in turn, should allow monetary policies to ease in some emerging economies.

The OECD-based leading indicator bottomed in April and has led six-month industrial output growth by between two and five months at the last four turning points, suggesting that economic momentum will revive from September at the latest. Caveat: the latest indicator reading is for July – it may suffer a setback in August because of financial market weakness.

A recent pick-up in the Baltic dry index of bulk freight rates could be an early sign that E7 industrial weakness and associated commodity price declines are approaching an end.