Egypt, it’s too early to tell – comment by Stuart Thomson, chief economist at Ignis Asset Managment

“Asked to comment on the French Revolution, Chairman Mao famously claimed that it was “too early to tell”. The same sentiment applies to Egypt and potential contagion to other oppressive regimes in the region. However, two early implications have been the performance of commodity prices and other risk markets. 
“In terms of GDP, Egypt is rather insignificant. Consequently a benign resolution of the conflict with a pro-western Government would barely produce a ripple across financial markets. Unfortunately, the geopolitical importance of Egypt is considerably greater in terms of the flow of oil through the Suez Canal. While there are alternative routes, the disruption would undoubtedly drive global uncertainty. The most disturbing tail risk would be an administration that is hostile to both America and Israel. 
“It’s impossible to determine at this stage whether these tail risks will be reached, but we believe that Middle Eastern uncertainty is another demonstration of our VILE decade. This Volatile Inflation, Limited Expansion will drive global macroeconomic and financial volatility throughout the terrible teens and are a consequence of global imbalances that have been allowed to build up over the past few decades.  
“The movement in commodity prices reflects the geopolitical threat to oil prices and concerns of other developing economies over the threat to their internal stability posed by higher food prices. The response to the latter threat has been to stockpile soft commodities and/or limit food exports. This will exacerbate the problem for other economies and provides a prisoners’ dilemma for emerging market economies. 
“The main impetus to global commodity prices remains the negative real interest rates across emerging economies as a result of their shadowing Fed monetary policy. This in turn has accelerated global liquidity flowing through to commodity markets. There is growing pressure on central banks in developed economies, particularly the US, to halt this liquidity surge.  The FOMC statement last week maintained the Fed’s dovish stance on the economy and provided further evidence that the Chairman would likely to extend quantitative easing beyond the planned end point of June.  
“Ben Bernanke will attend the next round of Congressional testimonies during February and undoubtedly enjoy a more hostile reception from the elected officials reflecting the international and domestic hostility towards quantitative easing. It is both disingenuous and self-serving to blame Egyptian unrest on rising food prices as a direct consequence of Fed monetary policy given the deep underlying imbalances in the economy. Nevertheless, complaints from mercantilist emerging market economies will undoubtedly resonate over the next few months. 
“We expect the US economy to accelerate over this period. Friday’s preliminary fourth quarter GDP data was optically strong, but in a deleveraging environment nominal growth is more important than real GDP growth. Real GDP grew by 3.2% annualised during the fourth quarter after growth of 1.7% and 2.6% respectively in the second and third quarters. The major positives were consumer expenditure and real final sales, which grew by 4.4% and 7.1% respectively.” 
These are the views of the author and do not necessarily reflect those of Ignis Asset Management. 
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