Commodity prices likely to face slowdown by end of 2023

Prices for a wide range of commodities have climbed to their highest level in seven years or more as drillers, miners and farmers struggle to keep up with booming demand while the economy recovers from the pandemic.

Energy prices are at the highest level since 2014 and non-energy prices are the strongest since 2011, according to the World Bank.

Commodity prices have always been cyclical and recent increases will almost certainly create conditions for the next downturn, as they have in the past.

In theory, price escalation could be reversed by faster growth in production, slower growth in consumption, or some combination of the two.

In practice, the most likely trigger is a slowdown in the global manufacturing cycle which causes commodity consumption growth to slow.

There are already signs the manufacturing cycle has passed an inflection point, with rapid growth in the wake of the pandemic and lockdowns giving way to moderate growth rates by the fourth quarter of 2021.

Business surveys, industrial production estimates and freight movements all indicate the rate of expansion slowed in the second half of last year in North America, Europe and Asia.

Global manufacturing is likely to experience a significant midcycle slowdown if not an end-of-cycle recession by the middle of 2023.

Rising commodity prices, energy shortages, capacity constraints in manufacturing, errors in demand forecasting and rising interest rates are themselves all potential triggers.

Since 1950, there have been at least 19 distinct troughs in the U.S. manufacturing activity index compiled by the Institute for Supply Management.

Not all of these were declared official “recessions” by the U.S. National Bureau of Economic Research’s Business Cycle Dating Committee. Some were mid-cycle slowdowns, periods of softer growth in an otherwise uninterrupted expansion, but they were usually serious enough to force the U.S. central bank to cut interest rates or supply other stimulus.

The long relatively low-inflation expansions of the 1960s, 1990s and 2010s were all punctuated by one or more of these mid-cycle slowdowns.