Global market analyst Natixis Commodities Markets (NCM) warns of a “rocky road” ahead for the global financial markets, which could wreak havoc on commodities as demand will slow.

The company says in its quarterly report that, in the US, there have been two con-secutive months of weak non-farm payrolls while, in China, purchasing managers index manufacturing indices are slip-ping towards 50, if not below.

The company adds that, around the world, indices sug-gest that the flow of goods being transported is slowing. For the base and precious metals mar-kets, the length and potential severity of this soft patch will be crucial determinants of price movements.

In Europe, governments are fighting to reduce fiscal deficits, in many cases by cutting spend- ing and raising taxes faster than their economies are slowing. NCM reports that, under-standably, this is impacting negatively on both household and government spending and, while corporations went into the recent crisis in much better shape than banks, governments or households, it is difficult for them to maintain strong eco-nomic growth all by themselves.

Europe is not the only region subject to fiscal austerity. NCM points out that, although it is easily obscured by the lack of progress in negotiations on the US debt ceiling, the US is already undergoing its own process of fiscal austerity. Apart from the large number of spending programmes that have expired this year, public-sector employment has contracted by 639 000 jobs over the past 12 months, in many cases forced by limited spending and budget deficits for states and local municipalities.

The rise in raw material prices since the middle of 2010 has been detrimental to the recent pace of economic growth.

For most developed coun-tries, this has manifested itself in the form of a squeeze in real household incomes as well as corporate profit margins, particularly when combined with tightening fiscal austerity measures. In developing coun-tries, where inflation has spread rapidly to core measures as wages rise, authorities have gradually tightened mone-tary policy in an attempt to control inflation. In this way, commodity prices are acting as a constraint to global growth.

The immediate outlook for the global economy depends on how severe these factors are, how long they persist and what further policy responses are enacted to address or, in some cases, exacerbate these problems.

NCM feels that the most significant risk to the immediate economic outlook is the danger of fiscal crisis, most likely in Europe but increasingly possible in the US as well.

In Europe, while a default by Greece, Portugal or Ireland might be painful, these coun-tries are small enough to be supported by the European Union and international institutions. Were Italy or Spain to find themselves cut off from the international financial markets, however, it is more difficult to see how a rescue could be mobilised, the report states.