Seas of Uncertainty: The Impact of Red Sea Attacks on the Global Economy

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Understanding the potential impact of Red Sea attacks on the global economy is crucial, as recent incidents involving Houthi militants have led to significant disruptions in commercial shipping routes. These attacks have resulted in the blockage of cargo ships, causing concerns over potential disruptions to global supply networks and increased manufacturing costs just as the world is grappling with inflation.

The Red Sea is an important transit route that connects to the Suez Canal, which handles approximately 10-15% of global commerce and 30% of container shipping, including oil exports. Houthi rebels in Yemen, with support from Iran, claim that they are retaliating against Israel’s attack on Gaza. In response to these attacks, the US announced security operations in the Red Sea in mid-December. However, tensions escalated when the Houthis fired multiple missiles and drones on Tuesday.

The US and UK conducted air raids targeting Houthi sites in Yemen on Thursday, which further escalated the situation. President Joe Biden stated that these strikes were a reaction to the threat posed to the “freedom of navigation in one of the world’s most vital waterways”. As the situation worsens, the global economy is likely to experience greater effects.

Several market effects have already been observed. Germany’s Tesla electric vehicle manufacturing has been forced to shut down due to component shortages caused by the attacks. Warnings have been issued regarding cargo delays and rising marine transport costs worldwide. The prices of Brent and US crude oil jumped 4% on Friday due to concerns about a potential larger conflict in the Middle East that could disrupt supply. Moreover, Iran’s capture of an oil ship in the Gulf of Oman on Thursday has further unsettled energy markets.

Research from the World Bank has highlighted the potential consequences of the attacks on shipping routes, indicating that they could erode supply networks and increase the likelihood of inflationary “bottlenecks”. As a result of the threat posed by the Houthis, major cargo shipping companies such as Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM, and ONE are avoiding the Red Sea. These companies have had to reroute their ships around South Africa’s Cape of Good Hope, resulting in significant delays of up to three weeks.

Vincent Clerc, the CEO of Maersk, has warned that it may take “months” to make the Red Sea safe again, emphasizing the potential consequences for global economic growth. Research from Germany’s Kiel Institute for the World Economy has indicated that attacks on cargo ships in the Red Sea cut global commerce by 1.3% between November and December. Rising shipping costs are likely to have an impact on consumer pricing.

There are concerns that further escalation or attacks on oil and bulk ships could have even more dramatic consequences for the economy. These ships carry vital raw goods such as iron ore, grain, and lumber. The World Bank has warned that escalating conflicts could substantially disrupt energy supplies and lead to an increase in energy prices, which would affect the prices of other commodities. Capital Economics has identified energy costs as the greatest danger, highlighting the potential impact on consumers if there is a sharp escalation in the underlying military conflict.

Economists from Oxford Economics have predicted that inflation will fall, but prices may rise due to the disruptions caused by the attacks. Container transportation prices are already at high levels and could boost worldwide inflation by 0.6 percentage points, twice what was observed in early December. As a result of the attacks and the subsequent disruptions, various companies have experienced late deliveries and increased costs. European automakers, for instance, have had to redirect their exports through the Cape of Good Hope, resulting in two-week delays and higher expenditures. Retailers like Ikea have also warned of shipment delays and inventory shortages.

Businesses worldwide are closely monitoring the situation and activating contingency plans. Abercrombie & Fitch, for example, has stated that it will employ air freight when possible to mitigate delays. However, the next few weeks leading up to the Lunar New Year in China will present additional challenges for shippers, who are expected to rush to get orders out before facilities halt for the holiday. The global shipping capacity will remain limited, and shortages of empty containers are expected to arise rapidly, further delaying enterprises.

While major ports in Europe and the United States have not yet been significantly affected by the Red Sea attacks, they remain vigilant about the potential repercussions. Port authorities expect supply chain disruptions to persist for an extended period, even if the attacks were to cease immediately. The existing disruptions and delays will require lengthy resolution, impacting various industries and sectors around the world.

In summary, the recent attacks in the Red Sea by Houthi militants have had significant implications for the global economy. These attacks have disrupted commercial shipping routes, increasing concerns about the impact on global supply networks and manufacturing costs. The Suez Canal, a crucial transit route, handles a substantial portion of worldwide commerce and container shipping. The potential consequences of these attacks include delays in cargo shipments, rising shipping costs, and potential inflationary pressures. As tensions rise and conflicts escalate, the global economy faces the risk of further disruptions and adverse effects on various industries.

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