Since January, the key forecasting indicators followed here have been suggesting a peak in global economic growth in spring 2013. According to some commentators, recent sizeable falls in some commodity prices signal that a big slowdown is already under way. On closer inspection, however, the message from commodity markets is ambiguous.

Precious metals, of course, have fallen hardest but are not a good coincident indicator of the economy. The pessimists place greater weight on recent declines in crude oil and base metals. Yet a broad measure of industrial commodity prices – the Journal of Commerce (JoC) index – has so far displayed limited weakness and remains above its level at end-2012.

The JoC index comprises 18 commodities*, including crude oil and six base metals, with weights designed to reflect importance in economic activity. Index movements correlate reasonably closely with changes in global industrial output – see first chart.

The JoC measure fell sharply in late 2011 following a mid-year industrial slowdown. A smaller decline occurred in mid 2012 despite more pronounced economic weakness. The index, however, rallied in late 2012 / early 2013, confirming a pick-up in global industrial expansion.

At Friday’s close, the JoC index was still 8% higher than six months earlier (i.e. at end-October). Weakness in oil and base metals, in other words, has yet to generalise to other industrial commodities.

This suggests an alternative, positive interpretation of recent developments – a lower oil price represents a favourable supply shock to a global economy that continues to grow respectably, as evidenced by resilience in a broad basket of industrial commodities.

The oil price fall has already contributed to a decline in global inflation – the six-month change in consumer prices, seasonally adjusted, eased to a 30-month low in March. This, in turn, has sustained global real money expansion at a healthy level despite slower nominal monetary trends – second chart.

The recent fall in the US retail gasoline price has yet to feed through fully to the consumer prices index – third chart. The retail price, moreover, should decline further if the wholesale price remains at its current level.

The central scenario here remains for global growth to moderate from the spring but remain respectable – see previous post. Recent commodity price developments, rather than being a reason for increased pessimism, are consistent with this forecast.

*The constituents are cotton, burlap, steel, copper, aluminium, zinc, lead, tin, nickel, hides, rubber, tallow, plywood, red oak, benzene, crude oil, ethylene and natural gas.