Rising Middle East tensions have only escalated in 2024.

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Initially, the direct economic impact was seen as being less severe than the potential impact upon market sentiment. However, the Yemen Civil War, raging since 2014, has spilled over as the Houthis, who control much of the west of Yemen and are typically seen as an Iranian proxy force, started attacking Western ships – particularly targeting US and Israeli vessels.

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The level of hostility in the region means MSC* and Maersk, the largest and second largest shipping companies in the world, suspended container voyages through the Bab al-Mandab strait** before Christmas.

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In order to avoid the short cut to Europe via the Red Sea, ships can re-route around the coast of Western Africa. But this can take an extra 7-14 days, with estimates varying*** as to the additional time and cost.

This must be taken in the context that there has been a significant increase in the cost of insuring voyages to go through the Red Sea, with some underwritings withdrawing coverage altogether****. So, while detours will lengthen delivery times, the goods will still arrive, albeit around a week later.

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This will also decrease the volume of things that can be shipped in any single period as the global shipping stock does not alter particularly dynamically. This means that fewer goods will be shipped over a year given the increased journey time.

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Fortunately, we do not expect that this situation will see another Covid-19-style inflation spike for several reasons.

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Firstly, demand conditions are much softer now, there are no “Biden Bucks”, or furlough payouts to employees keeping demand high while supply is disrupted. Equally, structurally supply is in much better shape; during the Covid-19 crisis the industry was wrong footed and shipping routes were thrown into chaos for many months.

There is also the option to use airfreight, in instances where costs allow for it. It is worth noting that 12-15% of global trade travels through the Red Sea*****, so this effective closing of the route may impede inflation’s decline this year, but it is unlikely to derail it.

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References (*)

1. More big shipping firms stop Red Sea routes after attacks
2. Maersk suspends container voyages through Bab al-Mandab strait due to attacks
3. What it takes to reroute the world's biggest cargo ships on a 4,000 mile detour
4. Red Sea attacks drive up war insurance costs
5. Inflation risk from Red Sea disruption, warns economist

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Central map image credit: Robert/Adobe Stock