Red Sea Chaos Risks Driving Up Price Of Goods For Global Economy

(Bloomberg) -- Attacks in the Red Sea linked to the Israel-Hamas war will cause shipping delays and drive up the price of goods, bringing a new inflation risk to the economy. 

Shipping companies are diverting cargoes after Iran-backed Houthi militants attacked commercial vessels plying the Red Sea. The vessels will have to sail around Africa instead of taking the shorter route through the Suez Canal.

This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics analysts including Gerard DiPippo wrote in a note. The Red Sea is one of the world’s most important shipping lanes, carrying about 14% of global maritime trade. Among the economies most affected by the trade disruptions would be Greece, Jordan, Sri Lanka and Bulgaria, the analysts said.

Read more: Shippers Dig In for Long Haul as Red Sea Chaos Worsens

More than 20% of containers passing through the Suez Canal carry goods from Asia to European and Mediterranean nations, according to logistics intelligence firm project44. Diverted ships would have to sail around Africa to reach Europe, adding a minimum of seven to 10 days to the journey, they estimated. 

Still, there are reasons to believe the disruptions will have only a moderate economic impact, Bloomberg Economics said.

While the cost to send a 40-foot container from Shanghai to Rotterdam has jumped 44% from the end of October before the attacks began, and by more than 26% to Genoa, they remain well below levels in 2021 and 2022 during the pandemic, data compiled by Bloomberg show. 

Read more: Red Sea Shipping Chaos in Numbers as Houthis Menace Trade

The effect on inflation in Europe will be limited as markets and shipping companies adjust to the new situation, according to Bloomberg Economics.

Chinese exports have also been weak all year and could slow next month, as factories typically wind down early in the year due to the end of Christmas demand and before the Lunar New Year break in Asia. However if the disruptions continue or worsen, it could put more downward pressure on that trade.

Read more: What Houthi Red Sea Attacks Mean for Global Trade: QuickTake

Exports from China to Europe fell in each month since June, while export growth from Japan to Western Europe slowed to 1.1% in November from a year earlier. 

The US has announced a new task force intended to protect commercial vessels traveling through the Red Sea. Countries participating include the UK, Bahrain, Canada, France and Italy. Both Japan and China have military bases in Djibouti, near the Red Sea, but have not said they would take part in the naval effort.

“The best the world can hope for may be a moderate risk scenario, in which shipping is diverted for at least several months until the security situation in the Red Sea stabilizes,” the Bloomberg Economics analysts wrote.

This may not be the optimal scenario but it’s happening when there’s more shipping capacity and it’s better than some of the alternatives, they added.

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