Global commodity selloff is flashing warning signs for world economy

Global commodity prices are getting hammered, as trade war tensions once more fester between the world’s two largest economies — and recession signals are flashing red.

The S&P GSCI index, which tracks global commodities across the energy, metals and agriculture sectors, shows that prices have declined over 8% since April 2, when U.S. President Donald Trump announced a slew of “reciprocal” tariffs. That was despite the slight recovery in prices after the White House leader announced a tariff U-turn Wednesday.

Trump has nevertheless turned up the heat on China by hiking the tariff rate on Chinese goods to 125%.

“The collapse in commodities [prices] is a circuit breaker, a sign that a global recession is afoot,” said Marko Papic, a macro and geopolitical expert at BCA Research.

China is the largest consumer of commodities, and the higher-than-expected tariffs are likely to be a drag not only on the country’s growth, but also on its consumption of certain commodities, in particular energy and industrial metals.

Of all the commodities in the basket, energy fell the most since April 2, declining around 12%, according to S&P Global’s GSCI energy gauge. 

Industrial metals posted the second steepest loss of around 9%, followed by soft commodities, which fell roughly 5.2%, according to S&P’s Global.

As for oil, the wider negative sentiment also coincided with OPEC+’s recent decision to accelerate the pace of the group’s production increases. OPEC+ sped up pace of hikes, but increases had been previously decided. Oil prices are still at multi-year lows despite the slight rebound following Trump’s tariff U-turn, with global benchmark Brent around $64.78 a barrel and the U.S. West Texas Intermediate at $61.77 per barrel. Oil prices are sensitive to the trade escalation, given China’s status as the largest crude importer and the fact that crude commodities are denominated in the U.S. dollar.

Goldman Sachs slashed its oil price forecast for both crude benchmarks to $62 per barrel for Brent and $58 per barrel for WTI by the end of the year.

Expectations of further declines in commodities prices are feeding a growing chorus of U.S. recession calls. JPMorgan expects U.S. gross domestic product to contract 0.3% this year, after a robust year for growth.

“The broader move lower we’ve seen in crude oil since 2 April suggests the market is pricing in bigger odds of a recession,” ING’s commodities strategists said.

“Commodity prices are being hammered by fast deteriorating sentiment as global recession fears mount amid escalating trade and geopolitical tensions,” said Sabrin Chowdhury, head of commodities at Fitch Solutions’ research unit BMI. She added that the probability of the U.S. falling into recession is now more than 50%.

Industrial metals also continue to suffer as trade tensions and recession fears compound with mainland China’s bleak property sector outlook, she added. 

Copper in particular is a leading indicator of economic health, given its use in many sectors. While copper futures in New York rallied on Wednesday, they are currently trading at $8,380 per ton on the NYMEX, marking an over 16% decline since April 2, data from FactSet showed.

Metal markets are likely to remain pressured as China, the world’s largest consumer of copper, increasingly comes under the spotlight.

“With growth in the U.S. likely to slow on the back of tariffs and China already struggling to revive its economy, demand for copper and other industrial metals is likely to weaken,” said Ewa Manthey, a commodities strategist at ING.

Similarly, Goldman Sachs cut its price forecast for copper, citing a surplus of the metal and its forecast of a stagnant U.S. economy.

“We expect a hit to ex-China demand from weaker GDP growth, as well as a lower 2024 base for China demand than previously forecast,” the investment bank wrote in a note. 

In the event of a U.S. recession, Goldman Sachs forecasts copper prices could fall even further to the lows seen in the trade war in Trump’s first term and the Covid-19 pandemic, at $6,500 and $5,900 per ton, respectively.