What's the greater threat?

Markets fear the turmoil in Egypt could spread and disrupt oil supplies, boosting the price of crude and threatening the broader economy.

But Capital Economics believes the impact on agricultural commodities and food prices could be the bigger threat.

While higher energy prices are a serious worry for weak economies, particularly those where central banks could be prompted to boost borrowing costs too early, OPEC has much room to increase supplies, said chief international economist Julian Jessop. And rising oil prices globally could be viewed as "a not entirely unwelcome symptom of a decent recovery" at any rate, Mr. Jessop said in a research report.

"For now, we are more concerned about the impact of the events in Egypt on food prices," Mr. Jessop said.

"Unlike the rise in the cost of oil, the recent increases in agricultural commodity prices mainly reflect supply shocks, which have been compounded by export bans and hoarding. Extreme weather conditions last year damaged crops in many parts of the world, notably harvests of wheat and sugar. The resulting increases in food prices have contributed to social unrest in many countries, including in Egypt. Governments in the rest of the Middle East and elsewhere, fearful of contagion, are responding by restricting exports of agricultural commodities and/or increasing imports to add to precautionary stockpiles."

In the short term, he warned, the restrictive actions of governments exacerbate the problem.

"This suggests that, even if the crisis in Egypt eases soon, the actions taken by governments elsewhere to prevent similar uprisings in their own countries will add to the upward pressure on global agricultural commodity prices. This will add to the upward pressure on food price inflation too ... and is probably a better reason than higher oil prices to expect the global recovery to disappoint."

• How governments are reacting in the face of food riots

Food prices forecast to jump

Canada has yet to feel the sting of surging food costs but that’s about to change, a new forecast suggests.

Prices have been climbing around the world, helping to fuel unrest in regions such as North Africa, The Globe and Mail’s Paul Waldie reports today. But, so far, food inflation has been tame in Canada.

Capital Economics, however, says in a research report that soaring commodity prices will catch up and boost food inflation in Canada to about 5 per cent later this year, from its current level just shy of 2 per cent. That would add 0.8 percentage points to the overall rise in the consumer price index, said David Madani, Canada economist at Capital Economics in Toronto.

“However, we think this relative price shock will be temporary, as commodity prices will fall back,” he said. “Despite the pick-up in pipeline inflation, underlying inflation is likely to be contained by disinflationary pressures from excess industrial capacity, high unemployment, moderating wage wage growth, and slower growth in broad money supply.”

As Globe and Mail writer Tavia Grant reported last week, food prices in Canada climbed 1.7 per cent in December from a year earlier, a faster pace than November’s 1.5 per cent. But in regions such as India, for example, food inflation is running at 16 per cent.

• The Wal-Mart effect: Food inflation tame in Canada

Why markets are so nervous about oil

The price of oil is so far today in something of a holding pattern, though Brent crude remains above $101 (U.S.) a barrel.

Markets fear not only disruption to oil supplies through the Suez Canal and the pipeline - the pipeline alone carries about 2.3 million barrels a day while up to a million pass through the canal, according to Moody's Analytics - but also that the unrest that began in Tunisia and spread to Egypt will ripple through the region to oil producing nations.

"Remember that the Suez Canal is an important conduit for all kinds of trade, and that important oil pipelines run through Egypt directly," Mr. Weinberg said. "If Egypt's turmoil spills over into the Gulf states, oil production may be crimped at the source."

In an opinion piece today published in The Financial Times, New York University Professor Nouriel Roubini, chairman and co-founder of Roubini Global Economics, reminds his readers that three of the last five recessions globally followed a Middle East "geopolitical shock" that drove up oil prices. In the other two, he noted, oil also played a role.

"Even before the recent political shocks in the Middle East, oil prices had increased above $90, driven not only by the fundamentals of a global economic recovery but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets amid near-zero policy rates and quantitative easing in advanced economies; momentum and herding behaviour (as in 2007-08); and limited and inelastic supply of new oil capacity," Mr. Roubini said. "Now oil prices are skirting closer to $100 a barrel."

A disruption to the canal could boost prices by $3 to $5 a barrel, economist Chris Lafakis of Moody's Analytics calculated, while a pipeline shutdown could have twice the impact.

While concerned, he noted, markets don't at this point see a disruption given that no ships have been damaged and demonstrators don't appear poised to shut down the canal or pipeline.

"A higher probability, but still unlikely, event is a significant disruption of crude oil production in Egypt and in other Arab countries with autocratic regimes, should insurrection in Egypt spread," he said. "Arab governments that also limit free speech, women's rights, and a free press and share Egypt's demographic and economic conditions could be targets of that unrest."

So while there don't appear to be fears of a price shock at this point, said currency strategist Sacha Tihanyi of Scotia Capital, there is nervousness. This angst comes amid already mounting fears over global inflationary pressures.

"With crude prices continuing to rise there is a concern that the current high prices could become a brake on growth, as well as being even more inflationary, and despite OPEC’s comments to the contrary that the current rise in prices is not driven by fundamentals, they may well have to start boosting production, or run the risk of derailing the global economic recovery," said CMC Markets analyst Michael Hewson.

• Egypt turmoil sends oil above $100
• After Moody's, S&P cuts Egypt
• Egypt upheaval puts damper on companies' operations
• Graphic: Egypt's Suez Canal still open for business
• Thousands converge in Cairo to demand end of Mubarak reign
• Read our complete coverage of the crisis in Egypt

Egypt's economy grinds to halt

Egypt's economy is crippled today as the protests mount.

Many multinationals have suspended operations, banking has slowed to a crawl, and tourism is suffering.

“Tourists are flying away; the capital is going to fly away as well,” Gehan Saleh, an economist at the Arab Academy for Science and Technology, told The New York Times.

"Concerns that turmoil in Egypt could expand to impact oil production or transportation have pushed prices through the roof," said Carl Weinberg, chief economist at High Frequency Economics, noting that Brent crude has topped $100 (U.S.) a barrel.

Carl Weinberg, chief economist at High Frequency Economics, cited some other little-known data: Banks in the euro zone are exposed to Egyptian borrowers to the tune of almost $38-billion, largely French and Italian institutions, while British banks account for almost $11-billion and U.S. banks about $5-billion.

"If banks in Egypt remain closed for more than 120 days, payments on these debts will not be able to be effected, for the most part."

Global manufacturing speeds up

There's a double-edged sword in the post-recession era: Economies are speeding up, notably for manufacturing, but so are inflationary pressures.

Purchasing managers' indexes from Europe and Asia today show factories continue to hum as industries bounce back, but input costs are also surging. If that filters through to the consumer level, as it has in some countries, monetary authorities will be under pressure to hike interest rates.

In the United States, the Institute for Supply Management reported today that the manufacturing sector also expanded again in January, this time at its fastest rate in about seven years.

• PMI surveys hint at deeper-seated inflation

Almost one in 10 without work in Europe

Unemployment continues to be stubbornly high, though dipping in some European countries.

The jobless level in the European Union held fast at 9.6 per cent in December, the Eurostat statistics agency said today, though that overall rate masks the huge differences among its 27 member nations.

The Netherlands, Luxembourg and Austria posted the lowest unemployment rates, at 4.3 per cent, 4.9 per cent and 5 per cent, respectively, while the highest were registed in Spain, at 20.2 per cent, and Lithuania and Latvia, both at 18.3 per cent.

Jobless levels fell in eight EU countries from a year earlier - notably, in Germany - but climbed in 18, and held steady in Britain.

One wonders how long it will be before they begin talking about a lost generation in Europe, where the jobless rate for youths is now at 21 per cent.

BCE at CRTC

BCE Inc. has agreed to pay more for the privilege of acquiring the CTV broadcast assets, Globe and Mail media writer Susan Krashinsky reports today.

As the regulatory hearings got underway to examine the $1.3-billion deal struck in September, the company announced it would pay between $143-million and $221-million in benefits to the broadcast system. Under federal broadcast regulations, these “tangible benefits” are usually worth 10 per cent of the value of a deal.

• BCE agrees to benefits payment in CTV deal

BP rebounds in quarter

Here's some nifty math: BP PLC today said its costs for the cost of the Gulf of Mexico oil were almost $41-billion (U.S.) last year, it posted a fourth-quarter profit of $5.6-billion and an annual loss of $3.7-billion, and it resumed its dividend, at a cost of about $1.25-billion.

The energy giant is also selling two U.S. refineries, and said it remains on track for divestments this year of up to $30-billion.

"2011 will be a year of recovery and consolidation as we implement the changes we have identified to reduce operational risk and meet our commitments arising from the spill," said chief executive officer Bob Dudley. "But it will also be a year in which we have the opportunity to reset the company, adjusting the shape of our business, and focus on growing value for shareholders."

• BP posts full-year loss on Gulf blast

There is life after death

Credit rating agencies will be taking a fresh look at Iceland - remember, before there was Greece there was Iceland? - and could boost the tiny nation’s ratings, according to Bloomberg News.

Such a move follows a deal that ended a two-year battle between Iceland and Britain and the Netherlands over the collapse of a bank at the height of the financial crisis. Under the deal, which Iceland’s president still must approve, his government would pay about $5-billion (U.S.) to cover depositor claims.

“Of course, reaching an agreement and indeed one that is more beneficial to Iceland than the previous one is a factor that is positive for the rating,” analyst Kathrin Muehlbronner of Moody’s Investors Service told Bloomberg. A senior director at Fitch Ratings also told the news agency his company will publish a revised rating in the next few months.

Most of the money is expected to come from selling assets of Landsbanki, but the remainder will still be well below that of an earlier deal that voters, and the president, rejected.

Boyd Erman's Morning Meeting

Citigroup Inc. is adding more stock to banker bonuses, joining a wider trend by banks to reduce the cash component and pay more in stock, Streetwise columnist Boyd Erman reports today.

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