Prolonged disruptions in shipping through the Suez Canal could lead to rising prices and pressure on economic growth, particularly in Europe, which is already struggling with a mix of high inflation and economic recession. Below is an overview of the potential macroeconomic costs associated with these disruptions, following attacks by Houthi forces in Yemen on ships in the Red Sea, which forced companies to suspend or reroute their shipping routes. It is clear that supply chain disruptions add upward risks to the inflation outlook.
What are the risks?
About 15 percent of global shipping traffic, including around 30 percent of global container trade, passes through the Suez Canal. Rerouting ships around Africa would extend the round-trip duration by approximately two and a half weeks, reducing shipping capacity and increasing costs. According to estimates from UBS, "the longer transit time via the Cape of Good Hope reduces the actual capacity of the journey between Asia and Europe by 25 percent." Given that "such a voyage can take more than ten weeks, any short disruption could have a long-term impact lasting several months." However, this year’s holiday season is secure since most goods needed for Christmas have already arrived.
What happened in historical precedents?
When a container ship disrupted shipping traffic in the Suez Canal for six days in 2021, economists estimated that daily trade worth up to ten billion dollars was halted. Insurance claims from this incident could eventually reach as much as two billion dollars, according to estimates from Swiss Re.
What are the current costs?
Costs could arise through multiple channels. The immediate impact will be seen through energy prices, but markets remain calm so far. Oil prices have increased somewhat but not by more than one percent compared to last week. However, gas prices have fallen, indicating little concern about delays in liquefied natural gas shipments. Another cost entails rising shipping prices and increased insurance fees. Jan Hoffman, head of the logistics trade branch at the UN Conference on Trade and Development (UNCTAD), stated, "It’s bad news as it comes at a time when we are already facing some other trends negatively impacting shipping costs." Hoffman added, "Container shipping prices are now at their highest level for the year." He continued, "Latest container shipping prices are still low compared to the supply chain crisis during the COVID pandemic, but they are higher now than at any other time in 2023."
The most complex cost relates to shipment delays, which could lead to higher consumer prices as goods may take longer to reach consumers. Carsten Brzeski, an economist at ING, said, "We could see a return of supply chain issues, rising inflation, and slowing growth. Fortunately, not at the same scale as during the pandemic, but it will have a noticeable impact." He explained, "If the situation persists longer, we will see inflation rise again." The German Ministry of Economy, which considers the potential risks to its trade-dependent economy, noted that it is "monitoring events in the Red Sea closely." However, economists believe that "the disruptions that occurred in recent days are not yet sufficient to impact growth or inflation."
Will central banks take action?
A series of global supply challenges caused by the economic disruptions stemming from COVID-19 and the impact of post-pandemic recovery measures have pushed inflation to levels not seen since the 1970s, prompting central banks to respond with unprecedented monetary tightening. However, policymakers only respond to longer-term trends, so it is unlikely they will act unless they see a sustained impact that could alter inflation trajectories for years to come. Nevertheless, most major central banks are now looking to maintain high interest rates for some time, and any disruption that could increase inflation globally may heighten caution regarding swift monetary easing.
