The Financial Times warns that US strikes on Houthi targets in Yemen raise fears of a broader conflict in the Middle East that could lead to higher prices at a time when inflation appears to be subsiding.
The British newspaper said – in a report – that the Houthi attacks, which began last October, led to a large-scale diversion of cargo ships away from the Red Sea.
According to the newspaper, economists expected that the impact of these attacks on commodity prices would be relatively contained, but concerns are now rising about the more serious indirect effects on basic commodities, including oil, if American forces become more deeply involved in a regional crisis that has been raging since Operation Flood. Al-Aqsa was launched by the Islamic Resistance Movement (Hamas), followed by an Israeli war on the Gaza Strip since the seventh of last October.
The newspaper quoted experts and researchers as saying that the impact on global supply chains could become more severe if the crisis continues beyond the first half of the year.
What are the effects of the Houthi attacks so far?
The Red Sea is a vital commercial shipping lane, accounting for 15% of total global maritime trade, including 8% of grains, 12% of seaborne oil, and 8% of seaborne liquefied natural gas.
Since the first Houthi attack on October 19, traffic in the Red Sea has declined significantly.
The latest monthly trade index – published by the Kiel Institute for the World Economy last Thursday – showed that following the Houthi attacks, container flows through the Red Sea were less than half the usual level last December and fell to less than 70% of usual volumes in early January. The current second, according to what the British newspaper reports.
With the circumvention of Africa – where ships take from 7 days to 20 additional days – this has led to a rise in shipping prices for a standard container transported from China to Northern Europe from about 1,500 dollars last November to more than 4,000 dollars.
Some economies have already begun to feel the effects of this, and Egypt is likely to be one of them, given its dependence on shipping through the Suez Canal, which collected more than $9 billion in transit fees during the last fiscal year, the newspaper adds.
A number of companies reported being subjected to pressure, as the Tesla factory in Germany stopped production until next February 11 because it lacked some components, as a result of long shipping times around the Cape of Good Hope.
How serious are shipping disruptions to the broader economy?
The British newspaper says that the disruption is significant enough for the United States and its allies to take military action against the Houthis. Since the outbreak of the Israeli war on Gaza, economic policymakers have been pointing to a broader conflict in the Middle East as a major “upside risk” to inflation, which currently appears to be declining in major economies.
The newspaper adds that central bank governors are relatively optimistic about the consequences that the current conditions may have on the overall economy, and indicates that shipping prices are still much lower than the peak they reached at $14,000 for shipping a container during the Corona pandemic.
According to the newspaper, a number of experts do not expect noticeable consequences on consumer prices given that shipping costs represent a small percentage of the value of high-priced goods, such as consumer electronics, in addition to the fact that companies will learn how to manage their inventory and pricing for longer shipping timelines.
They also believe that companies’ inventory levels should allow most to handle longer shipping times, at a time when slowing consumer demand following a wave of interest rate increases is limiting companies’ ability to raise prices and pass on higher shipping costs to customers.
Is the situation reassuring?
The newspaper goes on to say that the current situation “does not necessarily mean that economic policymakers are able to be reassured,” and quotes analysts who say that the prolonged period of disruption will turn into a more serious problem.
The consulting firm Oxford Economics said – before the US strikes – that if the Red Sea remains closed to commercial traffic for several months, rising shipping prices could add 0.7 percentage points to annual consumer price index inflation rates by the end of 2024.
The newspaper also quotes Thomas Willadek, chief European economist at T. Rowe Rice, as saying that global shipping is under pressure due to the drought in the Panama Canal, and this may make the inflationary threat more important.
“Two of the world’s most important shipping lanes are being affected at the same time, so shipping rates are likely to remain high for some time,” Willadyk adds.
What is the biggest economic risk?
Analysts say the most serious risk to inflation is that oil and gas markets are frightened by the possibility of a broader conflict in the Middle East.
Some believe that high levels of spare capacity, slowing demand and strong supplies from outside the OPEC+ alliance have so far contained concerns about oil supply disruptions. But the recent jump in oil prices – in the wake of the US-led strikes that raised the price of crude above $80 a barrel – has heightened fears in financial markets that the US-led response could herald more problems to come.
The newspaper says, “Lower energy costs were a major driver behind the decline in inflation, so any rise would represent a setback for central banks’ efforts to curb price growth.”
