US GDP, The Greek Crisis and Other Indicators of Metal Prices Part One

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Exports, Global Trade, Macroeconomics

Here at MetalMiner we have grown into the business of identifying and monitoring key variables that impact metals prices. Undoubtedly, some variables are more important than others but many variables apply to all industrial metals. We try to cover those variables as regularly as possible. The financial crisis in Greece, (which impacts the entire EU) as well as US GDP numbers, point to similar trends, subject of this post. Let’s take a look at Greece first and attempt to identify why it matters for most metal markets.  A telling analysis of the situation appears in this week’s Economist in an op-ed piece entitled: Acropolis Now (subscription required). The Economist suggests three “warnings for the Greek debt crisis that extend beyond the Euro Zone. For brevity’s sake we will summarize here:

  1. Economic Greece serves as a symbol of “government indebtedness it’s debt totals more than 115% of GDP and can no longer “grow out of its troubles, nor devalue its currency and therefore requires a bailout (and a big one at that!)
  2. Political According to the Economist, Germany has “dithered in providing a bailout because of political fall-out within its own borders. But that country’s logic may prove more destructive than the alternative – shoring up Greece’s financial system. And as the Economist suggests, it may be in Germany’s self-interest to support Greece now since many of its own banks and private citizens who lend to Greece will lose money
  3. The cancer can spread the sovereign debt situation in Greece has similarities to Lehman’s failure in the US and can cause weakness elsewhere. Portugal, Spain and Italy also suffer from significant indebtedness and a failure to act quickly to shore up Greece’s books could provide a signal to the world financial community to pull out of other risky countries.

A Lehman styled meltdown in Europe would not only cause the Euro to plunge against the dollar (it has already dropped 7%) but rattle nerves and harm those that had expected more from joining the Euro, “It has left millions of people in Europe facing not the wealth that they expected from adopting the euro, but a period of potentially breathtaking austerity they are ill-prepared for.

A plunge in the Euro harms US exports whose goods become more expensive. And though other western economies may look to Asia as a larger source of exports, a weak Euro will certainly impact US businesses. In addition, as many of us here in the States can attest to during 2009, panic creates a cessation of activity. Individuals and companies slow their buying when confidence becomes shattered and/or they operate in uncertain environments. Nobody wants a repeat of 2009.

In a follow-up post we’ll examine the Q1 2010 GDP numbers and what that means for metals markets.

–Lisa Reisman

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