Despite China’s Progress, Oil and Copper Prices Point to a Global Economic Crisis
Despite China’s economic recovery from the impact of the COVID-19 pandemic, oil and copper prices remain weak, indicating that a global recession may be underway, according to economists. Despite China being the largest purchaser of both crude oil and copper, the prices of these two commodities have decreased by approximately 6% and 5% respectively since mid-January.
The end of strict COVID-19 restrictions in China has not produced a boost in global growth, as reflected in the lack of increase in oil prices and decrease in copper prices. The chief economist at the Institute of International Finance, Robin Brooks, stated in a tweet that this suggests a global recession is on the horizon.
The fall in oil and copper prices despite the economic revival in China, which is one of the largest consumers of raw materials, indicates the ongoing concern of investors about economic hazards, as stated by Craig Erlam, a market analyst at OANDA. Erlam stated that the decline in commodity prices in the presence of a robust Chinese economy implies that markets are preparing for slower growth in other regions.
However, not everyone agrees. According to Marc Ostwald, the Chief Economist and Global Strategist at ADM Investor Services, the decline in financial market liquidity, amid increasing global interest rates, may be responsible for the weakness in major commodity markets.
Ostwald mentioned that in an illiquid market, traders cannot agree on asset prices, leading to increased uncertainty about supply and demand prospects. Higher interest rates reduce a country’s money supply as they increase funding costs for investors, causing liquidity issues.
He also referred to the sudden change in oil prices last Friday to support his argument. Ostwald stated that if there was enough liquidity, the market wouldn’t experience such sudden fluctuations in prices, which was also evident in copper and Treasuries. He added that if physical oil traders were to be consulted, they would probably say that nothing much has changed in the past week and that this is a financial problem related to market liquidity rather than supply.