Falling commodity prices stoke fear of global recession

According to the International Monetary Fund, global food commodity prices rose nearly 40% in the two years before Russia's invasion of Ukraine. According to the Bloomberg Commodity Spot Index, they hit a record high in May 2022, two months after the Russian attack. 

But now commodity prices are expected to fall 21% in 2023 year on year. 

Global commodity prices have been on a downward trend for a while, Ayhan Kose, the World Bank's deputy chief economist, notes. 

"The commodity price drops are partly due to slower global growth, but they should not be seen as signals for a looming global recession," Kose told DW. 

"We expect that the world economy, while feeble, will avoid falling into recession in 2023-24. However, the materialization of severe downside risks could still yield that outcome," he added.

His forecasts assume that banking sector stress in the US and other advanced economies will remain contained. 

A drop in the World Bank's commodity price index in the first five months of 2023 reflects a redirection of key commodity exports from Russia and Ukraine, favorable winter weather, and more recently, slowing global economic activity, says Kose.

Burst dam adds to food price volatility 

The Food and Agriculture Organization's price index, which tracks the most traded food commodities around the world such as cereals, dairy and vegetable oils, shows that food commodity prices have fallen by 22% over the past year.

Vegetable oil prices have dropped the most, by 48%, reflecting lower prices for palm, soy, rapeseed and sunflower oils.

Ukraine produces almost half the world's sunflower oil and the Russian invasion sent prices up, but as exports have partly recovered they're now falling back.

Cereal prices, such as wheat and maize, have fallen by a quarter from their record-highs of a year ago. 

Wheat prices have dropped by 3.5% in the last month. The World Bank notes that the extension of the Black Sea grain deal until July 2023 provides temporary relief. But future renegotiations remain uncertain, posing potential supply limits later this year. 

"In addition, the fighting between Russia and Ukraine has led to the destruction of a giant dam raising fresh fears about Black Sea supplies from the war-torn area," Ole Hansen, head of commodity strategy at Saxo Bank, told DW.

The southern Ukraine region where the dam collapsed is home to large agricultural fields and rebuilding the dam will take years, which could hinder Ukraine's ability to handle floods in its breadbasket, said Scott Irwin, a professor of agricultural economics at the University of Illinois.

Energy prices up and down

The war in Ukraine had other dramatic economic effects last year. The S&P 500's energy sector was the market's best performer in 2021 and 2022, rising more than 50% in 2022 as Russia's invasion of Ukraine pushed up crude prices.

The mood has now changed, with the energy sector down 5% since the start of the year compared with a rise of 8% for the wider market.

Energy prices are projected to decline by 26% this year. The price of Brent crude oil is expected to average $84 (€78) a barrel this year — down 16% from the 2022 average. 

European and US natural gas prices are forecast to halve between 2022 and 2023, and coal prices are expected to decrease by 42% in 2023. 

On the supply side, the expansion of liquified natural gas (LNG) capacities has helped to mitigate pressures in natural gas markets, according to the Energy Information Administration. 

Supply constraints in oil markets could put upward pressure on crude oil prices, with output declines related to export pipeline outage in Iraq, wildfires in Canada, protests in Nigeria and maintenance works in Brazil, as well as OPEC+ production cuts.

Metals prices depend on China

Copper prices touched a six-month low this week as speculators increased short positions.

The recovery in domestic consumption in China has been slower than expected, further contributing to the lower prices of industrial metals.

The construction industry consumed 23% of metals in China in 2022, so weaker growth has negatively impacted demand for steel, aluminum and copper. 

Additionally, increased metal supply contributed to lower prices of metals. The largest suppliers like Rio Tinto, Vale and Glencore have increased shipments. 

The stability of metal prices in 2023 will depend on the growth of China's manufacturing sector, according to the World Bank.

Inflation worries still continue

Overall, the substantial inflation last year reflected significant increases in energy and food prices, especially following the onset of Russia's invasion of Ukraine. After peaking in the second half of 2022, it "will likely decline gradually over the course of 2023 as global growth slows, supply bottlenecks dissipate and commodity prices drift down," Kose said. "As such, a decline in commodity prices will certainly help lower global inflation."

But inflation is projected to remain above target in most advanced economies well into 2024, he notes.

"This means that the decline in commodity prices, by itself, will only be one of several factors that central banks will take into account as they calibrate their fight against price pressures."