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ALONG FOR THE RIDE
The US economy continues to surprise us. But not in a good way. The world’s biggest economy has suffered a housing slump, a credit crunch, market volatility and a loss of consumer confidence. And the bad news keeps rolling in. After each blow, the economy seems to pick itself up: investors announce a bailout, stocks recover, analysts spout rosy assessments about how it’s not as bad as it seems.
But the direction has become clear and economists are finally accepting that the US has entered a recession. The question now is how long and severe it will be.
Investors have already begun to adopt a bear-market mentality, shrugging off the Fed’s desperate rate cuts and snubbing Bush’s attempt to stave off recession with a $150 billion economic stimulus package.
Illusions of immunity are gone. Many believed the rise of Asian economies had allowed emerging markets to decouple from the US economy. Scrap that theory. In the first three weeks of January, more than $5 trillion evaporated from global equities in the wake of gloomy forecasts about the future of the US economy.
Egypt, which until now has largely escaped (and to some extent benefited from) the turmoil on the other side of the Atlantic, was caught in the storm. Egyptian financial markets took a drubbing on January 21 when retail investors, who account for 35 percent of the market, retreated amidst fears that the sinking US economy could pull other markets down with it. The CASE, Egypt’s benchmark index, ended the day down 4.2 percent – its sharpest single-day drop in over 18 months.
Within days, the CASE had bounced back. And by the end of the month, after oscillating wildly, the market was looking in much better shape. Still, we’re not in the clear yet. Expect the rollercoaster ride to continue as the tentacles of the US sub-prime fallout extend their reach across Europe and into the Middle East.
Forget talk about China’s growing economy buffering Egypt from a downturn in the US economy. American consumers spent $9.5 trillion last year, which is nearly 10 times more than consumers in China. So when the American economy recedes, Beijing is pulled along in the undertow. And like it or not, we’re all along for the ride.
CAM MCGRATH
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