How the Red Sea crisis could affect the global economy (analysis)

London (CNN) — Attacks by Iran-backed militias in the Red Sea have blocked one of the world’s main trade routes for most container cargo ships, ships that carry everything from car parts to Crocs from one corner of the planet to the other. Let’s go.

A prolonged closure of the waterway, which connects to the Suez Canal, could cripple global supply chains and send prices of manufactured goods soaring at a critical time in the fight against inflation. The Suez Canal contributes between 10% and 15% of global trade, including oil exports and 30% of global container shipping volume.

Yemen-based Houthi fighters claim revenge for Israel’s war against Hamas in Gaza. The US military and its allies have stepped up maritime security, but attacks continue: 21 Houthi missiles and drones were shot down late Tuesday.

US and British forces stepped up aggression on Thursday when they attacked more than 60 Houthi positions, as President Joe Biden said it was responding to the threat it posed to “freedom of navigation in one of the world’s most vital waterways”. It was a direct response.

As the crisis persists, the risks to the global economy increase. Retailers are already warning of delays, and the cost of shipping goods is rising.

Tesla said it would halt most production at its giant electric car factory in Germany as the attacks disrupted supplies of parts. Retailers are warning of shipping delays and the cost of shipping goods by sea is rising.

Oil prices are also rising – Brent and US crude rose about 3% on Friday – on fears of a wider regional war that could disrupt supplies. Energy markets were already on edge after Iran seized an oil tanker in the Gulf of Oman on Thursday.

In a semi-annual report released Tuesday, the World Bank warned that disruptions to key shipping routes were “adding to supply networks and increasing the likelihood of inflation tipping points.”

Six of the 10 largest container shipping companies, namely Maersk, MSC, Hapag-Lloyd, CMA CGM, JIM and One, are largely or completely avoiding the Red Sea due to the threat from Houthi militias.

The danger to crew, cargo and ships has forced ships to divert around South Africa’s Cape of Good Hope, causing delays of up to three weeks.

This has already led to a significant increase in transportation costs, which may ultimately impact consumer prices. “The longer the shocks continue, the greater the impact of stagflation for the global economy,” Allianz chief economist Mohammed A. El Arian wrote last week, referring to the toxic combination of little or no economic growth and high inflation. There will be more.”

If the war between Israel and Hamas turns into a broader regional conflict or the Houthis decide to redirect their attacks against oil tankers and cargo ships that transport vital raw materials such as iron ore, grain and timber, So the consequences for the global economy will still be more serious.

“In the context of escalating conflicts, energy supplies could also be significantly disrupted, leading to a surge in energy prices,” the World Bank report said. “This will have a significant impact on the prices of other commodities.”

According to Capital Economics, the threat of energy prices is the biggest risk.

“While current shipping disruptions are unlikely to alter the downward trend in global inflation, a sharp escalation in the underlying military conflict could push energy prices higher, spillover to consumers,” Simon wrote. McAdam and Lilly Millard, consulting economists at the firm, in a note last week.

Oxford Economics also expects inflation to remain moderate, but still sees risks to price rises. If container shipping costs remain at their current level, which nearly doubled by early December, global inflation could rise by about 0.6 percentage points, according to Ben May, the firm’s head of global macroeconomic research, as of Jan. 4. In a note.

delivery delay

Some European automakers have diverted their shipments around the Cape of Good Hope. A spokesman for the European Automobile Manufacturers Association said, “This has increased costs and caused a delay of about two weeks.”

And retailers such as Swedish furniture company Ikea have warned of shipping delays and possible shortages of some products. Similarly, British clothing retailer Next said last week: “If difficulties with access to the Suez Canal continue, some delays in stock deliveries are likely at the beginning of the year.”

Crocs also reported that items bound for Europe were taking two weeks longer than usual to arrive. The shoe maker does not currently expect a “material impact” on its business, but told CNN it would “continue to monitor the situation closely.”

This is not the only one. Companies around the world are worried, hoping the disruption will end soon, but if it doesn’t then the contingency plans put in place during the pandemic will begin to go up the drain.

Abercrombie & Fitch plans to use air freight whenever possible to avoid delays, according to an email to suppliers seen by Bloomberg. “We change transportation modes and/or shipping routes when necessary to maintain the flow of goods,” a company spokesperson told CNN.

The situation could worsen in the coming weeks as shippers rush to pick up orders from China before factories close for the country’s Lunar New Year holidays.

“The next five weeks before Chinese New Year on Feb. 10 are going to be very difficult for shippers and shipping,” Philip Demas, principal at Drewry Supply Chain Advisors, said in comments recorded and posted online Monday.

However, he said overall shipping capacity overhang means spot rates (the price of a one-time shipment of goods as opposed to pre-agreed prices) “will fall again after Chinese New Year.”

total crisis

In addition to increasing spot freight rates due to the attacks in the Red Sea, carriers are adding emergency surcharges.

Judah Levin, head of research at logistics company Freightos, estimated “total prices” of between $5,000 and $8,000 per container for major trade routes out of Asia, 2.5 to 4 times higher than “normal levels” for this time of year. Are.

However, that figure is still 45% to 75% below its “pandemic peak” in late 2021, Levin said. At the time, surging demand for goods from domestic consumers was met by supply constraints, ranging from container shortages to port congestion.

The Suez Canal debacle compounded existing problems in shipping, with severe drought already restricting traffic through the vital Panama Canal.

“Companies trying to transport goods around the world are in a state of complete crisis: they can no longer rely on the Panama Canal or the Suez Canal,” says Carolina Klint, Commercial Director for Europe of Professional Services Marsh McLennan.

According to logistics company CH Robinson, some ocean carriers that normally transit the Panama Canal were diverted to the Suez Canal before the attacks intensified in the Red Sea.

Matthew Burgess, the company’s vice president of global ocean services, said global shipping capacity will remain limited for some time. “There will be a shortage of space between Asia and Europe for at least the next eight weeks due to the additional time required to use the Cape of Good Hope route,” he told CNN.

“As we have seen in previous disruptions to global shipping, shortages of empty containers are likely to occur quickly, exacerbating delays as companies may have to wait another two to three weeks for empty containers.”

At least for now, major ports in Europe and the United States, including Rotterdam, Los Angeles and the ports of New York and New Jersey, have seen limited impact from the Red Sea crisis. But they are on high alert about the possible consequences.

“This is another disruption in the supply chain,” Gene Seroka, executive director of the Port of Los Angeles, told CNN. “It’s not going to go away in three or four weeks.”

And even if the attacks stopped today, allowing most ships to cross the Red Sea, the past effects could still continue for some time, according to CH Robinson Burgess. “The disruption and delays that are already occurring will take a long time to resolve.”

editor’s Note: This article was updated on Friday, January 12.