Merryn's Blog

The next big threat to the global economy? Algeria

The war in Libya may be in its final days, but now there is a new threat to the global economy. As the third-largest exporter of natural gas to Europe, unrest in Algeria could be catastrophic.

Coffee with an economist from one of our very big mainstream fund management companies this morning. The interesting thing about this was that she has become a deflationist.

She sees the risk of high inflation further out, once the global economy has improved and we see some demand coming back.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But right now, what with the new realisation that the banking crisis never went away, and the evidence of consumer stress, she can't see inflation being much of a bother.

Once the cost-push factors of the last few years (the rise in the oil price, VAT and so on) drop out of the numbers, we will, she says, be back fretting about deflation again.

Advertisement
Advertisement - Article continues below

Will we? In a sense yes. Of course we live in deflationary times credit is tight, real wage rises are non existent and consumers are stretched about as far as possible, so it is hard to see an easy way out of our mess.

But just because the underlying macro environment of our economy is nastily deflationary doesn't mean we can't keep seeing a high or rising consumer price index and retail price index. Why? Same reason as in 2008. Politics.

A new note from Bedlam Asset Management makes the point nicely. Most of the media has lost interest in Tunisia and in Egypt. And now that Libya, with its 1.7m barrels of much-in-demand light pure oil looks like it is sorting itself out, you could be forgiven for thinking that global politics were calming a little.

But the Arab Spring isn't over yet. There could be a much more disruptive surprise on the horizon for markets: Algeria. Since 1945 this has, says Bedlam, had one of the "most woeful" histories of the Middle East and North Africa(MENA) nations. Independence came in 1962. Three presidents, varying only in "their degree of brutality", followed.

Then in 1991 there was an election. The Islamic Salvation Front (FIS) won. The West weren't that into that. The result was overturned and another army appointee took the top job. Since 1999, the president has been Abdelaziz Bouteflika. He won the last election with 90% of the vote, something that would have made even the old Stalinist politicians "blush with embarrassment."

Now he controls the Executive, the military and the "highly corrupt" state oil company. And not in a very nice way (the likes of Amnesty International have long been banned). Civil unrest and suicide bombings have accelerated recently; relations with neighbours are "odious"; and under the circumstances, the chances of the regime hanging on as freedom explodes around it are "small and diminishing".

Advertisement
Advertisement - Article continues below

This matters, largely because it just does, but also because Algeria exports 1.8m barrels of oil a day and is thesixth largest natural gas producer in the world. In Europe, it is third only to Russia and Norway. Hassi R'Mel, its pipeline crossroad, is the most important single gas hub in Europe. So if Algeria sees a messy regime change, oil, and in particular, gas prices will soar.

The consensus view is the one I heard this morning that oil prices will soon fall thanks to low demand. But what if it isn't demand that will bedriving prices but supply? Energy markets, as Bedlam says, "look very vulnerable."

Our view has long been that the next few years are about a deflationary macro environment overlaid with consumer price inflation (mainly driven by external events). Algeria is just one more reason to keep watching for just that danger.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/economy/global-economy/600839/the-charts-that-matter-markets-dont-know-which-way-to-turn
Global Economy

The charts that matter: markets don’t know which way to turn

With investors continuing to worry about the coronavirus and the threat of higher inflation in the US, John Stepek looks at what that's done to the ch…
15 Feb 2020
Visit/economy/global-economy/600798/the-charts-that-matter-reverse-corona-panic-takes-hold
Global Economy

The charts that matter: reverse corona-panic takes hold

Investors seem to have decided that the coronavirus panic was just yet another buying opportunity. John Stepek looks at how the week's events affect t…
8 Feb 2020

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/economy/600813/money-minute-thursday-13-february-latest-numbers-from-barclays-and-centrica
Economy

Money Minute Thursday 13 February: latest numbers from Barclays and Centrica

Today's Money Minute previews earnings reports from Barclays Bank and Centrica, plus the latest US employment picture
13 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019