02 Feb 2024 | News & Feature

Global Macro Panorama, Part 1: Commodities – Trampled under Thucydides: Global economic outlook in the shadow of US-China struggles

  • The year 2023 saw normalization from the supply and liquidity shocks in 2022. The path to normalcy was smoothed by three critical elements: commodities (especially energy), China’s recovery, and US fiscal policy. Each of these, however, carry the seed of potential instability that may throw the global economy off-kilter in 2024 and beyond.
  • Falling oil prices, in part due to issuance from the US SPR, enabled the US (and other countries) to defy the Phillips curve tradeoff by having a decline in inflation without a rise in unemployment. However, global oil consumption growth is now starting to overtake production, partly due to continued output cut by OPEC+.
  • Two factors serve as buffers against a potential spike in global energy prices—high inventory levels and increased US shale oil output. The latter, however, bears the hallmark of a consolidating industry rather than an expanding one, implying possible return of price pressures in the medium/long-term.
  • Global food inflation has eased due to lower fertilizer prices and El Niño weather phenomenon. However, the latter mostly helps temperate crops, while the prices of tropical produce have remained elevated.
  • China’s supply-side stimulus may not be a major boost for commodity prices, given large excess inventories that have been built up particularly for coal and nickel. Closing this supply overhang requires both a reduction in output and an increase in demand for fixed-asset investment, which appears to be help in the case of copper.
  • Ongoing supply chain disruptions due to Houthi attacks in the Red Sea may not boost commodity prices as some might expect, if it leads to a delay in the highly-anticipated Fed pivot. Without “cooperation” from the Fed’s loose policy, commodities may not undergo a sustained multi-year boom à la the 1930s, 1970s, or 2000s despite the backdrop of geopolitical turmoil.