With a new season beginning, Mecardo has a look at the economic backdrop to the wool market. As wool is an input into a long supply chain, the strength of economic growth at the end of the supply chain is the main determinant of the price trends we see in our greasy wool market.
Mecardo last looked at the economic backdrop to the wool
market in early March, concluding there was little optimism coming from China
and Europe, with the USA providing the best signals for demand.
Firstly, for a change, an improving economic measure. Figure
1 looks at Europe through the German Ifo Manufacturing Index (read more here), comparing it to the merino price (indicator fleece
component of the clip) in US dollar terms. In recent months, the Ifo survey has improved
(there is
a range of indices produced by the Ifo Institute). It is early days yet, but
the downtrend in the Ifo manufacturing index from 2021 to 2024 looks to have
found a base. In US dollar terms, the merino price has done likewise in the past year.
Anecdotal feedback and general commentary (see Nomura
Securities (read here)
as an example ) has not improved for China. If anything, it has become worse.
If Australian Wool Innovation is correct and half of the Australian merino clip
(or equivalent) is consumed at the retail level in China, this continues to be
a big problem. As the US Federal Reserve notes, “Chinese domestic consumption
is weak, never fully recovering from COVID-era lockdowns and continues to be
constrained by the ongoing property slump” (read
more here).
Figure
2 compares the Chinese GDP (economic growth) and the change in the merino price
(USD terms again), with guestimates for the GDP growth rate in 2025.
A saving grace may be that China is a big country with a big economy so parts
of it may provide some demand for wool.
In early 2025, the US economy was poised for better growth
than Europe or China. The vicissitudes of the Trump administration’s policies
on trade are testing this growth. Figure 3 compares the year-on-year change in the US 5-year bond yield (inverted), advanced by 18 months, and the merino price in US
dollar terms. This measure provides some forecasting of the trend we can expect
for demand,
hence wool prices. The change in bond yield jumps around, with a rising trend
pointing to a generally positive influence on demand in the coming season (so
long as the aforementioned vicissitudes do not grow).
What does it mean?
Economy wise it is still a mixed bag with plenty of weakness and uncertainty around the world. The pickup in Germany is a welcome change, with domestic Chinese demand remaining weak and uncertainty emanating from the USA.
Key Points
- The Ifo Index points to the German manufacturing sector (and the wider economy) beginning to pick up, after trending downwards between 2021 and 2024.
- While Chinese economic data shows growth, domestic consumption remains weak.
- US bonds continue to indicate the US economy will be a positive factor in the coming season.
Click on graph to expand
Click on graph to expand
Click on graph to expand
Data sources: Ifo Institute, AWEX, RBA, US Federal Reserve, World Bank, Nomura, ICS, Mecardo
