Supply chain challenges and higher inflation are moderating global economic growth, with last year’s pace of expansion set to slow this year and next, potentially dragging down demand for commodities. If commodity demand slows down, prices could reflect the moderation in economies. This could take place before the end of 2023, Reuters’ market analyst John Kemp argues. According to Kemp, historical patterns in economic cycles suggest that we could see a slowdown in economic expansion next year.
This, combined with interest rate hikes as early as this year, could weigh on global manufacturing and growth and potentially lower the demand for some commodities.
Forecasts point to slower economic growth in 2022 and 2023 compared to 2021 when economies rebounded from the 2020 recession to hit 5.9 percent growth.
“The global economy enters 2022 in a weaker position than previously expected,” the International Monetary Fund (IMF) said in its World Economic Outlook Update this week. As a result, the IMF revised down its 2022 growth estimate to 4.4 percent in 2022—half a percentage point lower than in the October World Economic Outlook (WEO). The downward revision largely reflects forecast markdowns in the two largest economies—the United States and China, the IMF said.
“Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies. The ongoing retrenchment of China’s real estate sector and slower-than-expected recovery of private consumption also have limited growth prospects,” said the fund.
Next year, global growth is expected to slow to 3.8 percent. Although this is 0.2 percentage points higher than in the previous forecast, the upgrade largely reflects a mechanical pickup after current drags on growth dissipate in the second half of 2022. Unsurprisingly, the IMF forecast is conditional on most countries overcoming the pandemic by end-2022, and no new variants necessitating large-scale mobility restrictions or lockdowns.
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“Elevated inflation is expected to persist for longer than envisioned in the October WEO, with ongoing supply chain disruptions and high energy prices continuing in 2022,” the IMF noted.
“Assuming medium-term inflation expectations remain well anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens, and demand rebalances away from goods-intensive consumption towards services,” the fund added.
Rising interest rates, a slowdown in manufacturing growth, and moderating economic growth could ease upward price pressures on commodities.
The World Bank also warned this month of decelerating global growth in 2022 and 2023, “as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.”
“Global macroeconomic developments and commodity supply factors will likely cause boom-bust cycles to continue in commodity markets,” the World Bank said in its Global Economic Prospects report.
Despite the expected global growth slowdown over the coming months, prices of energy commodities and key energy transition metals could continue rising amid tighter-than-thought markets and soaring demand in the green energy drive, respectively.
Goldman Sachs, for example, said earlier this month that commodities overall were set for a supercycle that could potentially last a decade. Currently, we are seeing record dislocations in energy markets, metals markets, and agriculture markets, Jeff Currie, global head of commodities research at Goldman Sachs, told Bloomberg Television at the beginning of this month.
Goldman Sachs, which is “extremely bullish” on the whole commodity complex, is also very bullish on oil. Goldman expects that oil prices could hit $100 this year and rise to $105 per barrel in 2023 on the back of the “surprisingly large deficit” on the oil market due to the much milder and potentially briefer impact of Omicron on oil demand.
Tighter market balances, coupled with shrinking spare production capacity, have made a growing number of investment banks more bullish on oil. Major Wall Street banks, including Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, expect prices to hit $100 a barrel as soon as this year.
By Tsvetana Paraskova for Oilprice.com
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Yet, global oil demand and crude oil prices are projected to continue surging for at least the next five years underpinned by a unique combination: the most bullish global oil market since 2014 and strong indications that the oil market has already entered a supercycle phase defined as a sustained expansion usually driven by robust growth in demand. This extraordinary combination will not only damp down forecasts of slowing economic growth in 2022 but will also take Brent crude price to $120 a barrel and possibly beyond within the next few years.
Projected economic growth forecasts of 4.4% and 3.8% in 2022 and 2023 respectively are more than decent after the breath-taking 6.3% growth in 2021 even allowing for a creeping inflation.
Still, Brent crude oil price has risen above $91 a barrel in January and could be expected to touch $100 by the fourth quarter of 2022 or the first quarter of 2023 because of an oil market getting tighter and the odd geopolitical development here and there.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London