Red Sea Flare-Up Widens

"For the second time in three years, a conflict in Europe's unruly neighborhood is threatening to weaken a struggling economy, while a more robust U.S. is watching from a safe distance.

This time, attacks by Houthi rebels in Yemen targeting cargo ships in the Red Sea have caused more carriers to opt for the safer but longer and more costly trip around Africa via the Cape of Good Hope.

Those detours are leading retailers to worry about running out of stock. Some factories have suspended work because they need parts. If the threat persists, economists say the drop in inflation Europe enjoyed last year could slow, delaying a potential cut in key interest rates.

The latest geopolitical flare-up could cement a growing asymmetry between Europe and the U.S. As a large energy producer, the U.S. has emerged stronger from the crisis sparked by the sanctions on Russia.

And while some of its imports transit via the Suez Canal, their share is comparatively small, and the Pacific offers an alternative route for cargo from Asia.

For now, the supply-chain interruptions are modest compared with the more widespread blockages seen in 2020 and 2021, and their economic impact is likely to be proportionately smaller. Businesses also have learned lessons from interruptions during the pandemic, and have larger inventories.

IKEA boss Jesper Brodin said the Red Sea conflict has lengthened its shipping routes by about 10 days or longer though its customers aren't affected.

Discount retailer Pepco said the conflict has had a limited effect on product availability, but could hurt supply if it continues. The discount retailer -- which includes Poundland in the U.K. and Dealz and Pepco in continental Europe -- said on Thursday that Houthi attacks were leading to higher spot-freight rates and delays to container lead times.

But in the wake of a global pandemic and the largest European war in eight decades, the escalation of the conflict that began with the Oct. 7 attack on Israel by Hamas is a reminder that the outlook for the global economy increasingly is shaped by developments beyond the reach of economic policymakers.

Ships traveling through the Red Sea carry about 40% of the goods that are traded between Europe and Asia. The Houthis initially claimed to target Israeli ships or those bound for its ports but their attacks have been indiscriminate. That has prompted more operators to divert their traffic around the Cape of Good Hope.

Last week, Tesla said delays in delivery of components caused by the rerouting of ships would force it to suspend production at its only large factory in Europe, the GigaBerlin plant outside Berlin.

Extra traveling time reduces the annual capacity of each ship, and can affect freight costs on other routes, including those between Asia and the U.S. According to the Freightos Baltic Index, the average cost of transporting goods in a container across the globe doubled between Dec. 22 and Jan. 12.

Those times could lengthen further if diverted ships must wait to take on more fuel to complete their unplanned journeys at overstretched African ports, of which South Africa's Durban is the largest.

For Europe, the impact of the crisis largely would depend on the extent and duration of the disruption. Economists at Allianz Trade calculate that a doubling of freight costs for more than three months could push the eurozone's inflation rate up by three-quarters of a percentage point and reduce economic growth by nearly a percentage point. With the eurozone's economy already weak, that could push it into contraction this year." [1]

1.  World News: Red Sea Flare-Up Widens. Hannon, Paul; Boston, William.  Wall Street Journal, Eastern edition; New York, N.Y.. 19 Jan 2024: A.6.