Business World

The rally in some vital basic resources has endured into the second half of this year, but red flags are being raised too as hopes for global growth in 2010 risk being engulfed by commodity-induced inflation.

Oil and industrial metal copper, needed to fuel growth and therefore recovery, have made gains this year of 50 and 85 percent respectively.

“If, at this point, a rise in commodity prices were to drive input costs higher…this would derail any economic recovery,” said Philippe Bonnefoy, founder of Swiss-based investment adviser Cedar Partners.

Investors in those markets have fed on a tide of risk-seeking investments in global equity markets, as funds re-allocated money after the global financial meltdown, and on China’s restocking process.

Moving into the third quarter, China’s restocking is said to have faded, leading some analysts to conclude that green shoots had been priced in by now.

But while prices saw some sharp losses earlier this week, copper is still up some 14 percent so far this quarter, while oil is holding around $67 a barrel — keeping faith with share prices — and gold has kept a $900 an ounce handle even as flows into exchange traded products waned.

Crude oil and gold watchers say those markets were already pricing in potential inflation — a dangerous scenario for central banks looking to keep policy loose and credit cheap cashadvance.

“If rising commodity prices cause inflation (or raise inflationary expectations), they could force the U.S. Federal Reserve to raise rates too early,” said Adam Robinson, director of commodities at U.S. fund Armored Wolf.

“Tightening monetary policy before the economy is ready for it could stop economic growth in its tracks.”

GROWTH?

JP Morgan said in its quarterly note that strength in commodity markets in the first half of 2009 appeared to have pre-empted the global economic recovery.

“However, much of the strength has been due to the speed at which the supply side has adjusted to lower demand conditions,” the bank added.

Data from leading world economies suggests the global downturn is bottoming. But for a sustainable recovery, growth is key — and that is in short supply.

A Reuters survey this month of 50 economists worldwide showed global gross domestic product (GDP) contracting by 1.5 percent this year. Economists polled saw a surge from Asia as the driver to bring back global growth in 2010.

Figures due on Friday were expected to show the U.S. economy contracted for a fourth consecutive quarter, the first time that has happened in records dating to 1947. 

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