Understanding the Impact of Red Sea Attacks on the Global Economy
Houthi attacks in the Red Sea have had a significant impact on global trade and the economy. These militants have successfully blocked most cargo ships from one of the world’s primary commercial routes, which leads to the Suez Canal. The protracted shutdown of this route poses a threat to global supply networks and may raise manufacturing costs, especially at a crucial time when the world is battling against inflation.
The Suez Canal is responsible for handling 10-15% of worldwide commerce, including oil exports, and 30% of container shipping. Therefore, any disruption to its operation will have far-reaching effects. The Yemeni Houthi rebels claim that they are retaliating against Israel’s attack on Gaza and are supported by Iran. In response to the increasing threat, the US announced international Red Sea security operations in mid-December.
The situation escalated on Tuesday when the Houthis fired down 21 missiles and drones. In response to these attacks, the US and UK conducted air raids targeting Houthi sites on Thursday. These airstrikes have significantly raised tensions in the region, and US President Joe Biden justified the action as a means to preserve the freedom of navigation in one of the world’s most vital waterways.
As the situation worsens, the global economic effects will continue to increase. Companies in various industries have already felt the impact of the Red Sea attacks. Germany’s Tesla electric vehicle manufacturing has been forced to shut down due to component shortages caused by the assaults. Moreover, warnings about cargo delays and rising marine transport costs have been issued worldwide.
The recent capture of a Gulf of Oman oil ship by Iran on Thursday has further increased concerns in energy markets. Brent and US crude jumped 4% on Friday due to worries about a larger Middle East war that could disrupt supply. A World Bank research report published on Tuesday warned about the risks of interruption to important shipping routes, stating that it could erode slack in supply networks and increase the likelihood of inflationary bottlenecks.
To mitigate the risks, six of the ten biggest cargo shipping companies, including Maersk, MSC, and Hapag-Lloyd, are now avoiding the Red Sea. Shippers have resorted to rerouting their ships around South Africa’s Cape of Good Hope, resulting in delays of up to three weeks. Maersk CEO Vincent Clerc expressed concerns about the lengthy process of making the Red Sea safe, stating that it could have significant consequences for global economic growth.
The impact of the attacks on cargo ships in the Red Sea has already been felt in global commerce. The Kiel Institute for the World Economy in Germany revealed that these attacks caused a 1.3% decrease in global trade between November and December. Shipping costs are rising, which could lead to increased consumer pricing. Allianz chief economist Mohamed A. El Erian warned about the stagflationary effects on the global economy if the disruptions persist.
The situation could worsen if the conflict between Israel and Hamas escalates or if the Houthis target oil and bulk ships that carry vital raw goods. The World Bank highlighted that escalating conflicts could substantially disrupt energy supplies, leading to an increase in energy prices, which would significantly impact the prices of other commodities. Energy costs are identified as one of the greatest dangers by consulting firm Capital Economics.
Various industries are already experiencing the negative consequences of the Red Sea attacks. European automakers have had to move their exports to the Cape of Good Hope, resulting in delays and higher expenditures. Retailers like Ikea have warned about shipment delays and inventory shortages. Businesses globally hope that the interruption will cease soon, but they are also dusting off their pandemic contingency plans in case the situation persists.
The disruptions in global shipping caused by the Red Sea attacks have also exacerbated pre-existing issues in the industry. Container shortages, port congestion, and a drought limiting Panama Canal traffic have all contributed to the crisis. Companies trying to move goods around the world are facing multiple challenges, as they cannot rely on the Panama Canal or the Suez Canal. This has created a total crisis for global supply chains.
Freight prices have increased significantly as a result of these disruptions. Container prices for key trade routes beginning in Asia are 2.5 to 4 times higher than normal levels for this time of year. While this is still lower than the pandemic peak during late 2021, it puts a strain on businesses already facing other supply obstacles. Container shortages and port congestion have made it difficult for companies to meet growing consumer demands.
The impact of the Red Sea attacks will have lasting effects even if the situation is resolved soon. The disruptions and delays experienced by various industries will require time to be resolved adequately. Empty equipment shortages are also expected to arise, potentially causing further delays for businesses. Major ports around the world are monitoring the situation closely, aware of the potential repercussions.
In conclusion, the Red Sea attacks by Houthi militants have had a significant impact on the global economy. The disruption to one of the world’s primary commercial routes has affected global supply networks, raised manufacturing costs, and increased concerns about inflation. The situation has already led to disruptions in various industries, including automotive manufacturing and retail. The global shipping industry is facing a crisis, as companies struggle to find alternative routes and deal with the rising costs. The long-term effects of these attacks will continue to pose challenges for businesses and global trade.
