Trade tensions and financial tightening weigh on global commodity prices

Global commodity prices tumbled 7.3% over the previous month in July, following June’s 0.1% drop. This slide in prices reflects fears of a full-blown trade war among key players that could lead to a sharp global economic downturn. Looking ahead, tighter global monetary policy conditions could add further downward pressure due to higher borrowing costs and heightened volatility in financial and foreign-exchange markets, especially in developing nations.

Prices for base metals, which are mostly used for industrial purposes, were down sharply in July on fears of a potential global slowdown. Precious metals followed suit as higher interest rates in the United States reduce the appetite for safe-haven assets such as gold and, to a lesser extent, other precious metals. Moreover, agricultural prices recorded another drop this month as China shifts away from importing U.S. agricultural products due to the ongoing trade spat between the two countries. Lower agricultural prices also reflected ample supply for key commodities. On the flip side, energy prices increased on the back of hot weather in some regions, including Europe and China, as well as strong growth in the United States.

Despite the current soft patch, our panel of analysts expects that global commodity prices will post solid year-on-year gains in Q4 2018, mostly due to higher prices for oil and its derivatives, as well as for agricultural products. FocusEconomics panelists surveyed this month expect global commodity prices to increase 6.4% in Q4 2018 from the same period in 2017.

Next year, however, analysts expect that lower energy prices, especially for oil and coal, will lead global commodity prices to post a smaller increase. The Consensus view among FocusEconomics panelists is that commodity prices will rise 0.9% in annual terms in Q4 2019.

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