The greasy wool market awaits improved demand which in turn depends upon economic growth in the major economies. This article updates where the economic backdrop to the wool stands.
Mecardo last looked at the macroeconomic backdrop to the
greasy wool market in early February (read
more here). The conclusion at the time was that weak growth in Europe and
China matched low greasy wool prices. Improved growth was required in one or
both of these economies to underpin higher wool prices.
Figure 1 updates the German Ifo manufacturing index (read
more here) along with the Merino price in US dollar terms to July. While
the merino price has drifted sideways the German manufacturing climate index
has materially weakened, with capacity utilisation below the long-term mean
level, order backlogs lower and expectations weaker. Basically, no joy for the
short term.
In Figure 2 the annual change in the Chinese GDP is shown,
along with the annual change in a deflated US dollar merino price from 2000
onwards. As mentioned in February growth in the Chinese GDY is lower than 20
years ago, reflecting a much larger economy. The rises and falls in the Chinese
GDP, while not perfect, do have some correlation to rises and falls in the
merino price. Keep in mind German manufacturing and the Chinese economy are
linked through trade. After picking up post-COVID the Chinese GDP has drifted
sideways around 5%.
The World Bank notes that economic activity in China was
buoyed by stronger exports and global demand in early 2024, with domestic
growth moderating (read
more here). The challenges posed by a continued contraction in the Chinese
property markets continue.
The Ifo Institute expects growth in the Euro area to pick up
in 2025 back to around 2022 levels, with a similar increase in global economic
production. The three key risks to this scenario highlighted by Ifo are
predictably the Ukraine war, events in the Middle East and the real estate
crisis in China.
What does it mean?
Wool cannot escape its nature as a manufacturing commodity, with demand hence price closely linked to economic growth in the major economies of the world. Economic growth in China and Europe has been weak through 2023 into 2024, with weak wool prices reflecting this. At some stage, economic growth will pick up and wool prices will benefit, hopefully happening in 2025 in line with the Ifo Institute expectations.
Key Points
- Weak economic indicators out of Germany and China continue to match low Merino prices
- As booms do not last forever, neither do recessions with the Ifo Institute expecting a gradual recovery in economic growth in 2025
Click on figure to expand
Click on figure to expand
Data sources: Ifo Institute, AWEX, RBA, MacroBusiness, World Bank, US Federal Reserve, ICS, Mecardo
