Commodity prices point towards a recovery in 2024

I talked before about how a surge in commodity prices can lead to a subsequent recession here.   The current decline in commodity prices points to an ultimate recovery in the world economy sometime in 2024.

There are several reasons for this relationship.   When commodity prices surge, they make commodity exporters richer, and commodity users poorer.  But the increased incomes of commodity exporters aren't spent immediately, while commodity users have to find the money to pay for higher commodity prices by spending less.  At the same time, rising commodity prices push up inflation and central banks tighten monetary policy.  This all plays out with a lag, but in essence it causes the world economy to slow. 

When commodity prices fall, commodity exporters lose out, and they have to reduce spending.  Often their economies struggle.  But there are fewer of them --- think of the small number of oil exporters vs the large number of oil consumers.  Meanwhile, the more numerous consuming countries are better off, because their real incomes improve.  Central Banks stop raising interest rates, confidence increases, and economies start to recover.

The complication comes from the fact that too fast economic growth leads to excessive commodity price increases, which in turn leads 18 months to two years later to the economic downturn.  Economic policy should be directed at stable growth, because of this feedback process.  But commodity price shocks can also occur because of politics.  The two oil embargoes in 1973 and 1979 caused the deep 1974 and 1980–1983 recessions.  But the embargoes only worked so well because the world economy was strong.   And of course, the deep 1980–1983 recession eventually caused the oil price to fall.

And the most recent strength in the world economy indirectly contributed to the war in Ukraine, which caused commodity prices to soar.  Why do I say this?  Because Russia is a major oil and gas exporter, and those prices rose as the world economy boomed post-covid, making the Russian government very confident that the war could be paid for and that the West couldn't respond with a boycott because it would cause commodity prices to soar, leading to recession and political crises.  They have been wrong so far.

Commodity prices now point to a late 24 or early 25 recovery.  But before that happens, we'll have a recession.   Looking just at this indicator, and there are obviously others, it looks as if it could be as deep as the GFC, but that was worsened by the Fed letting Lehman's go, which froze the banking system and caused a deep plunge in activity.  They have presumably learnt from past mistakes.  We'll see.