Houthi attacks in the Red Sea have disrupted crucial trade routes between Europe, the Middle East, and Asia, leading to concerns of renewed inflationary pressures.
Rerouting by major shipping companies and potential disruptions in the Suez Canal pose challenges for Europe, with inflation and energy price fluctuations becoming significant worries.
Recent events in the Red Sea, involving attacks by the Iran-based Houthi group, have disrupted the maritime navigation sector, pivotal for trade between Europe, the Middle East and Asia, raising concerns about the potential resurgence of inflationary pressures.
The ensuing fear has led to major shipping companies altering their routes to avoid the Red Sea and the Suez Canal, opting instead for the longer journey around the Cape of Good Hope. This decision has had significant repercussions, notably a drastic increase in shipping costs and time.
Earlier this month, in response to these attacks, the US and the UK conducted airstrikes on more than 60 Houthi targets in Yemen. US President Joe Biden declared the strikes would persist “as necessary” to safeguard international trade flow.
Nevertheless, the cost of shipping goods from Southeast Asia to Europe has soared to more than $6,000 (€5,500), a near tripling from the previous month and posing a risk of supply chain disruption and consumer price hikes, especially as global inflation has shown signs of abating.
What Red Sea disruptions mean for trade
The Suez Canal, a vital passage for 18% of global trade, is currently at risk. It is crucial for the transit of about 20% of the world’s oil and 25% of global LNG (liquified natural gas) trade. In Europe-Asia trade, 40% usually passes through the Red Sea, with the alternative route around the Horn of Africa costing around $1 million (€920,000) extra in fuel costs for a round trip.
World Trade Organisation Director-General Ngozi Okonjo-Iweala has cautioned that geopolitical conflicts, including those in the Red Sea and Suez Canal, could substantially disrupt the 2024 global trade recovery.
DP World’s Chief Finance Officer, Yuvraj Narayan, at last week’s World Economic Forum in Davos, stated: “The cost of goods into Europe from Asia will be significantly higher. … European consumers will feel the pain.”
Ewa Manthey, commodities strategist at ING Group, pointed out the vulnerability of the European market, especially in the LNG sector. In 2023, Qatar sent more than 20 billion cubic metres of LNG to Europe, comprising about 16% of European LNG imports. “These flows would all pass through the Red Sea and Suez Canal,” she said.
Velina Tchakarova, a geopolitical strategist, highlighted that Indian exports have more than doubled in value due to the Red Sea attacks. Approximately 80% of India’s nearly $14 billion-a-month (€12.8 billion) trade with Europe usually travels through the route.
Simone Tagliapietra, Senior Fellow at Bruegel and Professor at the Catholic University of Milan, warned of a potential regional escalation involving Iran, which could lead to an energy supply shock and further complicate central banks’ inflation control efforts.
Trade with China and Europe could be significantly disrupted
Maritime transportation forms the backbone of European Union-China trade corridors, accounting for 90% of their trade. Imports from China amounted to €626 billion in 2022, while exports stood at €230 billion, according to Eurostat data.
The Netherlands was the largest importer of goods from China among member states, with imports totalling €138.8 billion. Germany followed closely behind at €130 billion and Italy next at €57.5 billion. Czechia had the highest proportion of China in its extra-EU imports at 47.7%.
The three largest exporters to China on the export side, were Germany (€106.85 billion), France (€23.7 billion), and the Netherlands (€18,7 billion), with Germany having the highest share of China in its extra-EU exports at 15.0%.
Key imports from China included telecommunications equipment, automatic data processing machines, electrical machinery, and organo-inorganic compounds. The most significant categories of goods exported from the EU to China were machinery and vehicles (52%), followed by other manufactured goods (19%), and chemicals (16%).
The new inflationary risks emerging from the Red Sea disruptions could signal a resurgence of economic challenges for Europe.
As indicated in a recent IMF study, import prices were responsible for 40% of the overall changes in the European consumer inflation in the past two years.
Consequently, the heightened costs associated with importing goods from Asia are likely to be transferred to final consumers, leading to concerns about inflation.
It is crucial to keep a close watch on price fluctuations in energy commodities in the coming weeks. While energy goods constitute approximately 10% of euro area expenditure, their price fluctuations could exert a significant impact on overall European inflation.