How Red Sea Crisis May Affect Global Economy (Analysis)

LONDON (CNN) — Attacks by Iranian-backed fighters in the Red Sea have blocked one of the world’s main trade routes for most container cargo ships, which carry everything from car parts to Crocs from one corner of the planet to the other.

Prolonged closure of the waterway linking the Suez Canal could disrupt global supply chains and raise the price of manufactured goods at a critical time in the fight against inflation. The Suez Canal accounts for 10% to 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.

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

In a semi-annual report released on Tuesday, the World Bank warned that the disruption of key shipping routes is “sapping supply networks and increasing the likelihood of inflationary choke points.”

Six of the 10 largest container shipping companies, including Maersk, MSC, Hapg-Lloyd, CMA CGM, Zim and One, are avoiding the Red Sea largely or entirely because of the threat from Houthi fighters.

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

This has already significantly increased transportation costs, which may ultimately affect consumer prices. “The longer the shock continues, the greater the stagflationary implications for the global economy,” Allianz chief economist Mohammad A. El Arian wrote in X last week, citing the toxic combination of low or no economic growth and high inflation.

If the war between Israel and Hamas turns into a wider regional conflict, or if the Houthis decide to redirect their attacks against oil tankers and cargo ships, which transport critical raw materials such as iron ore, grain and timber, the consequences for the global economy will still follow. Be more serious.

“In the context of escalating conflicts, energy supplies may also be significantly disrupted, leading to a rebound in energy prices,” the World Bank report added. “This will have a significant impact on other commodity prices.”

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

“While current shipping disruptions are unlikely to change the downward trend in global inflation on their own, a sharp escalation in the underlying military conflict could drive up energy prices, impacting consumers,” Simon wrote. McAdam and Lily Millard, Economists in Consulting. firm, in a note last week.

Oxford Economics also expects inflation to moderate, but still sees downside risks to prices. If container shipping costs remain at their current level, nearly double the level at the start of December, global inflation could rise by about 0.6 percentage points, Ben May, the firm’s director of global macroeconomic research, said in a Jan. 4 note. .

Delay in delivery

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

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

Crocs also reported that items destined for Europe were taking two weeks longer than usual to arrive. The shoemaker doesn’t currently expect a “material impact” on its business, but told CNN it will “continue to monitor the situation closely.”

It’s not the only one. Companies around the world are on tenterhooks, hoping the disruption will end soon, but if it doesn’t, the contingency plans last deployed during the pandemic are beginning to crumble.

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.

Ikea has warned of shipping delays and possible shortages of some products due to disruptions in the Red Sea. Credit: Nathan Howard/Bloomberg/Getty Images

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

“The next five weeks leading up to the Chinese New Year on February 10 will be very difficult for shippers and shipping,” Philip Damas, principal at Drury Supply Chain Advisors, said in comments posted online Monday.

He noted, however, that overall shipping overcapacity means that spot rates (the cost 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 spot freight rate increases due to attacks in the Red Sea, carriers are adding emergency surcharges.

“Total prices” of $5,000 to $8,000 per container for major trade routes originating in Asia are 2.5 to 4 times higher than “normal levels” for this time of year, estimates Judah Levin, head of research at logistics company Freitos.

However, this figure is 45% to 75% below its “epidemic peak” in late 2021, Levin noted. At the time, increased demand for goods from homebound customers faced supply constraints, from container shortages to port congestion.

On December 4, 2023, the Port of Los Angeles in the United States. Credit: Eric Thayer/Bloomberg/Getty Images

The loss of the Suez Canal adds to the 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 an absolute crisis: they can’t rely on the Panama Canal or the Suez Canal,” says Carolina Clint, commercial director for Europe at Marsh McLennan, a professional services firm.

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.

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

“As we’ve seen in previous disruptions to global shipping, shortages of empty containers are likely to accelerate, further increasing delays as companies may have to wait another two to three weeks for empty containers.”

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

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

And even if the attacks stop today, allowing most ships to transit the Red Sea, according to CH Robinson’s Burgess, the earlier effects could still reverberate for some time. “The disruptions and delays that are already occurring will take some time to resolve.”