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Understanding the Impact of Red Sea Attacks on the Global Economy
The world has been closely monitoring the escalating conflicts in the Red Sea region, particularly the attacks carried out by Houthi militants. These attacks have led to the blockage of cargo ships on one of the world’s primary commercial routes, which has significant implications for the global economy. The closure of this route, which connects to the Suez Canal, could disrupt global supply networks and result in increased manufacturing costs at a critical moment in the fight against inflation.
The Suez Canal plays a crucial role in global commerce, accounting for 10-15% of worldwide trade, including oil exports, and 30% of container shipping. The recent attacks by Yemeni Houthi rebels, supported by Iran, are said to be a retaliatory measure against Israel’s Gaza attack. As a response, the US announced international Red Sea security operations in mid-December. However, the situation worsened when the Houthis fired 21 missiles and drones on Tuesday.
In an effort to counter the Houthi militants, the US and UK conducted air raids targeting Houthi sites on Thursday. President Joe Biden stated that the strike was a response to the threat faced by “freedom of navigation in one of the world’s most vital waterways.” As the situation continues to deteriorate, the global economic effects are expected to worsen.
The market has already begun to feel the impact of these attacks. Germany’s Tesla electric vehicle manufacturing has been forced to shut down due to component shortages caused by the assaults. Warnings of cargo delays and rising marine transport costs have been issued worldwide. The prices of Brent and US crude oil jumped by 4% on Friday due to concerns of a larger Middle East war that could disrupt the global supply of oil.
Energy markets were further destabilized when Iran captured an oil ship in the Gulf of Oman on Thursday. A recent World Bank research report highlighted the potential consequences of attacks on cargo ships in the Red Sea, warning that it could cause a 1.3% decline in global trade between November and December. The disruption to important shipping routes has also led to an erosion of slack in supply networks, increasing the likelihood of inflationary bottlenecks.
Due to the dangers posed by the Houthi militants, six of the largest cargo shipping companies, including Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM, and ONE, have decided to avoid the Red Sea. Instead, they are rerouting their ships around South Africa’s Cape of Good Hope, which has resulted in significant delays of up to three weeks. Maersk CEO Vincent Clerc has warned that making the Red Sea safe again could take months and could have significant consequences for global economic growth.
The consequences of the attacks on cargo ships in the Red Sea have also affected shipping costs, which could ultimately lead to higher consumer prices. Allianz chief economist Mohamed A. El Erian has warned that the longer these disruptions persist, the stronger the stagflationary effects will be on the global economy, referring to a combination of poor economic growth and high inflation. If the conflict between Israel and Hamas escalates further or if the Houthis attack oil and bulk ships, the economy will suffer even more.
The World Bank has also warned that escalating conflicts could disrupt energy supplies, leading to an increase in energy prices, which would significantly affect the prices of other commodities. Energy costs are considered to be the greatest risk in this situation. While the current shipping disruptions are not expected to disrupt the global downward trend in inflation, a sharp escalation of the underlying military conflict could cause energy prices to rise, which would be passed on to consumers.
In addition to delays and rising costs, companies are also facing logistical challenges. Some European automakers have had to shift their exports to the Cape of Good Hope, resulting in delays and increased expenses. Retailers like Ikea have also warned of shipment delays and inventory shortages. Businesses worldwide are hoping for a swift resolution to the disruption, but they are also preparing their pandemic contingency plans in case it continues.
To mitigate the impact of the disruption, companies are resorting to alternative modes of transportation and shipping routes. Abercrombie & Fitch, for example, plans to employ air freight whenever possible to prevent delays. However, these alternatives come with additional costs. The next five weeks leading up to the Chinese New Year are expected to be particularly challenging for shippers and shipping, with high demand and limited shipping capacity. This could lead to shortages of empty equipment and delay enterprises for two to three weeks.
The Red Sea attacks have created an absolute crisis in the shipping industry. Freight prices have surged, and companies are imposing emergency fees. Container prices for key trade routes starting in Asia are currently 2.5 to 4 times higher than normal levels for this time of year. This is a significant increase from the pandemic peak in late 2021. The growing demand for commodities and supply obstacles, such as container shortages and port congestion, have exacerbated the shipping issues. The closure of the Suez Canal has further exacerbated the problem, as the Panama Canal is also facing limitations due to a drought.
Major ports in Europe and the United States, such as Rotterdam, Los Angeles, and New York, have not yet been significantly affected by the Red Sea attacks. However, they remain vigilant about potential repercussions. The global shipping capacity is expected to remain limited, and even if the attacks were to cease today, the effects of previous disruptions would still linger.
In conclusion, the Red Sea attacks and the resultant blockage of cargo ships on a major commercial route have far-reaching implications for the global economy. The disruption of important shipping routes, rising shipping costs, and delays in cargo deliveries could lead to shortages, inflationary pressures, and increased manufacturing costs. The situation is further exacerbated by the potential for the conflict to escalate and impact energy supplies. While the full extent of the impact is yet to be determined, businesses across the globe are preparing for potential challenges and uncertainties in the coming months.
