Inflation at a 17-year high prompts bearish outlook

By Carly Fields

 

World GDP is forecast at 3.3% for 2022, down from 5.8% in 2021 and with little improvement predicted for 2023. That’s on the back of displacement and destruction - “two massive blocks” – in Ukraine and Russia’s isolation from the world economy “for years to come”.

Speaking at Singapore Maritime Week’s Baltic Freight and Commodity Forum, Rahul Kapoor, global head, commodity analytics and research at maritime and trade, S&P Global, described this as “significant deceleration”. 

“Price inflation will remain high for 2022,” Kapoor said. “Global CPI inflation is expected to pick up from 3.9%-4% in 2021 to a 17-year high of 6.4% in 2022. Inflation kills demand. This will subside to 3.4% in 2023, but we are still expecting 6% global inflation. That is a big number and many countries, many economies haven't seen that kind of inflation for decades.”

Real GDP growth, looking at countries that are expected to grow, will be led by Asia Pacific and the Middle East, which is benefiting from high commodity and energy prices. However, Kapoor said he is expecting relatively sluggish GDP growth in Europe and Latin America. 

Kapoor was also bearish on China with an expectation that mainland China's economy is resuming a long term deceleration in economic growth. “In our view China’s GDP growth is likely to fall short of the government's 5.5% target in 2022. And that will have a negative impact on the country’s demand.” S&P Global has revised its target for real GDP growth to around 5.1%, reflecting higher energy prices and slower growth in the European export market. 

While some cautious easing of monetary policies is being seen, and the bulk commodity markets looking for Chinese stimulus will see it returning in “bits and pieces”, Kapoor said, “it's not the Chinese stimulus that we saw back in 2014, back in 2008, and 2009. This will be more directed and is not expected to have the same impact in terms of demand that we saw earlier.” 

 

Six changes 

Regarding Russia’s invasion of Ukraine, S&P Global noted six ways in which the world has changed and how those changes impact the commodity markets. Firstly, values have gained greater sway in economic affairs. This means countries are turning inwards and looking for resources within their borders.

Second, there has been a global commodity shock. “There's no other way to put it, this is potentially the worst energy shock since 1973,” said Kapoor. Third is the impact on the global economy: “We are expecting widespread negative impact on the global economy, and this goes beyond higher oil and gas prices.” 

Fourth is the view that this is the beginning of economic de-integration between Russia and Europe. Fifth is the rebalancing of energy security and the pace of decarbonisation. “Some of those decarbonisation targets might be pushed back because in the end, you have to feed your populace as well as keep the lights on,” Kapoor said. Last is that financial sanctions are “becoming mainstream”. 

Kapoor noted that the Russian invasion of Ukraine could have far-reaching consequences on oil prices depending on one of three cases put forward by S&P Global. The rupture, or base case, sees a volatile range of 1-3 million barrels per day cut to Russian oil exports. Under this scenario, world oil demand growth is predicted at 2.6m barrels per day in 2022, rising to 3.2 million barrels per day in 2023; strategic reserves are released at times; and commercial inventories rise from the low levels of the first quarter of 2022. “That feeds into high inflation, higher energy prices, as well as lower demand,” Kapoor said.

In our view China’s GDP growth is likely to fall short of the government's 5.5% target in 2022. And that will have a negative impact on the country’s demand

‘Full stop’

The ’Full stop’ case sees about 4-6 million barrels per day of Russian oil exports stop. Here, there would be no supply growth from Iran; increases from Saudi Arabia and the UAE would be too little, too late; and strategic and commercial inventories would be drained to low levels, even as demand falls. “This is very unlikely in our view. This will send prices to $200 per barrel,” Kapoor said.

The last case sees limited oil loss and economic weaknesses. Here, an estimated 0-1 million barrels per day will be cut from Russian exports and there will be weaker oil demand. Under this scenario, inventories will have increased by the end of 2022. 

In general, Kapoor sees commodity prices retreating in the second half of 2022 and 2023 as demand cools and supply recovers. He makes the distinction that the current commodity shock is not being driven by booming global demand – as it was in 2003-2014 with the China- and emerging markets-led boom. “The current shock which we're seeing is being led by supply constraints and geopolitical instability, so as that goes over, you will see some of those prices retreating back,” he said. 

Russia-Ukraine, meanwhile, influences 10%-15% of the global commodity complex and the ongoing war is leading to structural reshuffling of global energy and agri-commodities flows. 

Supply chain problems – also influenced by the war - will continue to inflate industrial metal prices, but the expectation is for cooling into 2023. However, commodity prices this year are forecast to be “much higher”, Kapoor said.