Commodities downtrend points to global recession, analysts say

 

Price moderation of crude palm oil and other commodities has been expected for some time now, according to economics professor Geoffrey Williams.

PETALING JAYA: The fall in commodity prices lately has been viewed as a sign that a global recession, spurred by runaway inflationary pressures, is on the way.

This, according to JF Apex Securities head of research Lee Chung Cheng, could be an indicator that a recession is already taking shape in the developed markets in the EU and the US.

A recession in these markets is likely to spread to the developing markets in the rest of the world.

The International Monetary Fund (IMF) has warned that US hopes of avoiding recession will be “increasingly challenging” after its 2022 growth forecast was cut to 2.3% from 2.9% in late June on the back of data showing weaker consumer spending.

The IMF also revised the US gross domestic product (GDP) growth estimates for 2023 to 1% from 1.7% after an annual economic policy assessment meeting was held with US officials on June 24.

Reuters has attributed the Brent crude benchmark’s tumble to several factors. One factor is the Covid-19 curbs by top crude oil importer China.

Apart from that is the fact that investors have been selling oil positions on worries that aggressive interest rate hikes to stem inflation would spur an economic downturn.

This has hit the demand for oil.

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams said price moderation of commodities has been expected for some time and it reflects market normalisation and a forward look on future demand and supply.

“For oil, Brent Crude is down 25% on recent peaks, so hopefully this will continue,” Williams said.

He attributed the downtrend in crude palm oil (CPO) prices to a regularisation of supply from Indonesia but added that other food related commodity prices were also moderating as supply slowly recovers.

“This is all reflective of the ‘peak inflation’ idea that the worst of the cost-push inflation is over, but now we face the consequences of higher interest rates and bad policy to follow,” Williams said.

He added that tighter monetary policy in Malaysia and globally under the so-called “normalisation thesis” meant that higher interest rates were likely even as inflationary pressures receded, adding that high interest rates were not in themselves anti-inflationary but part of a policy recalibration process.

“Bad policy is an almost self-fulfilling expectation that recession will come,” Williams warned.

Should there be a recession, this would further increase the downward pressure on commodities as aggregate demand falls.

In the previous instance, the global financial crisis saw Brent Crude going from a peak of US$133.88 in June 2008 to a low of US$39.09 in February 2009. Similarly, natural gas prices fell from US$12.69 per metric million British thermal unit (mmbtu) to US$4.52 per mmbtu.

Standard Chartered Bank Malaysia also warned of possible policy mistakes should the US Federal Reserve keep a tight rein on monetary policy for a prolonged period in its attempt to tame inflation.

Head of asset allocation and thematic strategy Audrey Goh believes that there was a higher than 40% chance of the US economy falling into recession over the next 12 months amid blazing inflation and the Fed’s hawkish stance on interest rates.

“The good thing is that most of the indicators are still pointing towards an expansion, not a recession, but the vast majority of their trends are deteriorating and we are basically seeing more indicators flashing red,” Goh told a media briefing on Wednesday.

“If inflation remains high, that might force the Fed to keep policy tight for longer,” she added. “This means that the probability of a recession will likely increase over the course of the year.”

On the other hand, she said, the probability of inflation will subside if the Fed opts to focus on growth to address the current economic slowdown. - FMT