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Commodity prices have boomed over the last year, boosted by low interest rates and a snap back in global demand. The Goldman Sachs commodity index has risen by 55% from its low and the rally has been broad-based, lifting metals, oil and agricultural commodities.
The fact that prices collapsed last year and have soared this year is not surprising. The economic cycle has a powerful effect on commodity prices, just as it does on the value of equities, bonds and property. With supply relatively fixed in the short term, an unexpected shift in demand can cause sharp moves in commodity prices.
As the scale of the pandemic became clear last April the oil price fell into negative territory for the first time. The price of West Texas Intermediate dropped to -$38 a barrel (the absence of demand and the mounting costs of storage meant producers were briefly prepared to pay buyers to take oil off their hands). This year growth has come back more quickly than expected, and the problem is now one of rising prices and supply shortages. Semiconductor shortages have forced car producers to slow production. In the US the rising cost of building materials, particularly timber and copper, is pushing up prices for new homes.
Among the many unusual features of the recession perhaps the most striking is the resilience of jobs market. Unemployment rates have risen, but far less than had been feared based on the experience of recent recessions.
The world is moving into its fourth great energy transition, from fossil fuels to renewables. Previous transitions have marked new epochs. Fire gave hominids energy-rich food, with profound consequences for human evolution. Agriculture and animal power paved the way for settled societies and great cities. The industrial age, powered by fossil fuels, transformed the human condition – and created unimagined environmental damage.
The saying “Never make predictions, especially about the future” is attributed to individuals as varied as the physicist Niels Bohr and the baseball player Yogi Berra.
Sentiment in financial markets changes quickly. The big worry for most of the last year has been about collapsing growth and falling prices. Now markets are fretting about inflation. Such fears were behind the sharp sell-off in US equities in the early part of last week.
Through the vast majority of human existence homo sapiens held little power over nature. Efforts by our ancestors to ’tame’ nature were modest and had little lasting effect. In perhaps 200,000 years of human existence it has been only in the last 250 or so years, since the industrial revolution, that human activity has impinged on nature. Industrialisation, economic activity and a rising population have taken a toll.
In late 2019 we wrote a Briefing arguing that the car industry is a bellwether of the global economy and of globalisation. A few months later the sector faced the most destructive downturn since the financial crisis.
The emergence of a novel respiratory disease in late 2019 in Hubei province marked the start of what was to become a global pandemic. While the first recorded cases were in China, China has suffered a remarkably low death rate and has avoided the deep recessions that have befallen the rest of the world.
The world is emerging from a deep recession, and the recovery is coming faster than expected. With more than 800m vaccines administered globally, activity holding up despite lockdowns and additional fiscal stimulus coming, economists have been upgrading their GDP forecasts.
Our latest UK Chief Financial Officers Survey, released overnight, shines light on the plans of Britain’s largest corporates as the economy reopens. The full report is available at: https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
In the UK things are looking up on the health and economic fronts. COVID-19 cases, hospitalisations and deaths have fallen sharply from their January peaks. For two consecutive weeks, the number of deaths from all causes in England and Wales has been below the five-year average. On 28 March zero COVID-19 deaths were reported in London.