As the U.K economy reels from the impact of the coronavirus pandemic and the multi-year effects of Brexit, analysts expect growth to be suppressed, even failing to reach pre-pandemic levels until at least 2023.
Overall, countries across the globe are faced with several headwinds slowing down the pace of expansion despite billions of dollars to shore up the economy. As the U.K. claws back, aided by several factors, including NHS’ accelerated pace of vaccine rollout, the effects of commodity pricing remain a thorny issue. Specifically, analysts are now panning their focus on factors that directly affect commodity prices as a means of eliminating barriers, helping their economy wriggle out from the clutches of the COVID-19-induced depression.
Roaring Commodity Prices
Presently, their chief aim is to assess measures taken by China, for example, to impact “maximum” economic pain on one of the world’s largest Iron Ore producers in the world, Australia, as the commodity price continues to tear higher.
It is not only the price of Iron Ore that’s roaring. After dropping to negative territory as fears of the far-reaching effects of government-imposed containment steps permeated, Oil prices have recovered, reaching a two-year high. Oil prices could further increase in the days ahead as the tension rises among major oil producers, including Saudi Arabia and the UAE.
In all, the physical prices of commodities aren’t the primary drivers. Instead, most commodity instruments are fashioned as derivatives, which command trillions of dollars, actively traded in different bourses across the globe. Also, notably, derivatives are almost entirely a premise of professional traders, mainly boxing out retailers. Instead, equity funds tend to buy commodity options before repackaging them into various products for retail investors.
China Calming the Commodity Price Waters
Although seen as a burst of sunshine by fund managers seeking to bounce back and pare losses of last year, rising commodity prices is seen as an impediment to what governments across the world genuinely desire—an economic improvement after the unwanted depression of 2020.
China, the U.S., and the U.K. might have experienced some gains. However, steps taken by China, as mentioned earlier, for example, highlight the gravity of the situation and the general wishes of their respective governments amid what analysts have said would be a sustained mini-bounce of commodity price super cycle.
China has announced steps to quell commodity prices, saying they would auction off reserves of various commodities, including Copper, Zinc, and Aluminum. Additionally, through the National Development and Reform Commission (NDRC), China said it would standardize how commodity price indexes are compiled, making the process more transparent via tighter supervision.
There are over 170k tonnes of these non-ferrous metals, mostly Aluminum, which Chinese authorities plan to auction. It is part of a broad attempt to help release the steam off global commodity prices and, at the same time, patch its economy.
Rising PPI in China, analysts contend, directly contributes to pumping inflation. Therefore, by intervening and auctioning off their non-ferrous metal reserves, analysts reckon, it would reduce headline inflation, placing desired figures within PBoC’s target.
U.K. Economic Trends Prediction
Back in the U.K., optimism in vaccine rollout as a means of helping bring back normalcy and steering the economy in the right direction, analysts remain cautiously optimistic, saying U. K’s economy will only expand by around six percent in 2021, driven mainly by NHS’ lauded efforts.
The main challenge is the evolution of the virus, threatening to water down the efficacy of the current vaccine. For instance, the spike in infection and new caseload is mostly the highly infectious Delta virus.
Progress will be capped in 2022, dropping to 4.5 percent, as per analysts’ estimates. The U.K. continues to negotiate with the E.U. for a Free Trade Agreement (FTA). However, throughout 2023, the economy would likely expand back to the pre-pandemic level on the back of higher vaccination rates though at a slower pace than peers. This is squarely because of the country’s larger service sector and overall weakness in business investment advising monetary policy.
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