Global supply chains at risk
FEW SHIPS DESTINED FOR MAJOR US OR UK PORTS CURRENTLY PASS THROUGH RED SEA
Houthi attacks raise concerns of long trade disruptions.
There will be global consequences to disrupting shipping through the Suez Canal and these could include a pause on interest rate cuts, higher oil prices, stagflation and deglobalisation as growing geopolitical tensions in the Middle East disrupt global supply chains.
Shipping is disrupted by Houthi rebels attacking vessels passing through the Red Sea en route to the Suez Canal and key global economies beyond. Major shipping companies are warning of significant delivery delays, said David Rees, senior emerging markets economist at Schroders.
Satellite images show that virtually no ships destined for major European ports or the US and UK currently pass through the Red Sea and are, instead, diverting around southern Africa.
The latest disruption follows problems at the Panama Canal,
where a combination of drought associated with climate change and shifts in rainfall due to El Nino caused water levels to fall.
Meanwhile, in Europe, wet weather means that the level of the Rhine River, a key shipping route for German manufacturers, is too high and with the upcoming elections in Taiwan presenting
a risk of a repeat of Chinese military drills that disrupted Asian shipping routes in 2022, it seems that global supply chains face a perfect storm of risks.
Rees said this evokes painful memories of the supply chain problems that erupted during the Covid pandemic that contributed to the recent bout of high inflation
that ultimately forced global central banks to aggressively raise interest rates.
“Markets are now pricing in aggressive interest rate cuts in Europe, the UK and US, but all of this begs the question of whether renewed supply chain problems are about to drive up inflation, forcing policymakers to reassess their outlook.”
Much will depend on how long the current disruptions last, he said, but points out that at least three important differences in the global economic backdrop suggest that problems in the Red Sea are unlikely to lead to a major increase in inflation.
Firstly, Rees said, demand conditions are now much softer.
Secondly, he said, where lockdowns to contain the spread of Covid meant that demand was concentrated into the goods sector, consumption patterns are now much more balanced.
Thirdly, Rees pointed out that the supply side of the global economy is also in much better shape.
“Detours around southern Africa will lengthen delivery times, but goods will still arrive at their destinations, suggesting that outright shortages are unlikely,” he said.
“If anything, recent trade data from China show exports growing far more quickly in volume than in value terms.”
Rees said a more immediate risk to global inflation would be if tensions in the Middle East begin to affect the supply of commodities, in particular driving up energy prices. –