The deteriorating situation in the Red Sea poses risks to the global economy as supply chains are disrupted and prices are pushed higher.
Spot rates for containers traveling from Asia to Europe have more than doubled since the outbreak of tensions.
Geopolitical tensions have now spread into the Eastern Mediterranean and the Indian Ocean, underscoring the fragmentation of global trade relationships and assertion of national security that will likely push policymakers even more toward near-shoring or friend-shoring.
Absent a wider escalation, though, the consequences will be manageable. It is unlikely that the major global central banks will alter their monetary policy which is expected to result in policy rate reduction this year.
Still, the attacks on international shipping in and around the Red Sea have caused significant disruption to shipping routes from Asia and the Middle East to Europe.
Trade through the Red Sea accounts for 15% of total global sea trade, including vital supplies of grains, seaborn liquid natural gas and oil.
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Eight of the 10 largest container liners controlling 61% of global shipping capacity are now avoiding passage through the Bab al-Mandeb Strait, the maritime chokepoint linking the Indian Ocean with the Red Sea. About a third of global container traffic passes through this stretch.
Now, many ships are traveling around Africa, which adds about 10 to 14 days to journey times and significantly increases costs.
Since the end of December, the cost of shipping a 40-foot container from Shanghai to Rotterdam has increased by 164% from $1,700 to $4,400. Shipping to Genoa has increased by 167% from$2,000 to $5,200. By comparison, shipping from Shanghai to Los Angeles has increased by 33% from $2,100 to $2,800.
All this will cause delays for manufacturers and retailers in the United States and around the world.
For example, a Tesla factory in Germany has already announced that it will shut for two weeks.
The biggest impact on prices, though, will be for low-value bulky goods that rely on low-cost shipping.
But this isn’t set to be a repeat of the pandemic-induced supply chain crunches. Ports are not congested and there are more ships available than in 2021.
The best estimate is that higher shipping costs could add between 0.2 and 0.7 percentage points to inflation in the U.K. and Europe. This impact is likely to be more muted in the United States, though that could change if the situation deteriorates.
Commodity markets, though, have started to react. Oil prices have risen, and although they are also well below levels seen in the second half of last year, a disruption to oil or natural gas supplies is the most significant risk to the major industrial economies.
