Red Sea threat lays bare economic risks ahead of US and UK elections | Richard Partington

Red Sea threat lays bare economic risks ahead of US and UK elections | Richard Partington

Escalating tensions in the Middle East, rising oil prices and lengthy delays to international shipping have been hogging the headlines in the past few days. Before this, the prospects for the world economy had been looking a little brighter. But with military intervention in the Red Sea and disruption to global trade, all bets are off.As world leaders gather this week for the annual Davos meeting in Switzerland, the concern will be that last year’s downward march for inflation will be halted by rising geopolitical tensions. Since the last mountaintop bash, conflict has spread from eastern Europe to the Middle East, while the risk of a new cold war is mounting – not least highlighted by China’s frosty response to the election of Taiwan’s new pro-sovereignty president last week.With the rapidly deteriorating situation in the Middle East, global oil prices and freight costs have surged, while Britain and the US launching airstrikes against Houthi rebels last week raised the stakes after the Yemeni group’s attacks on Red Sea shipping.It isn’t any wonder the US-led military operation has been given a rather Ronseal working title: Operation Prosperity Guardian. The shipping lane serves as a vital artery for the economies of Europe and North America through the Suez canal, which handles 12% of global trade and 30% of container traffic. Most shipments are from Asia to the ports of northern Europe; with about 50 a day normally traversing the 120-mile canal, carrying $5bn of goods each week.With major shipping lines diverting traffic around the Cape of Good Hope on the southern tip of Africa to avoid Houthi attacks, about 3,000-3,500 nautical miles (6,000km) are being added to journeys connecting Europe with Asia. Forcing ships to travel for about 10 days longer on average comes with a cost: after 90% of shipments were diverted in the first week of January, container rates on the main Shanghai-Rotterdam route have jumped from $1,170 (£917) in early December to $4,400 on 11 January, according to the Dutch bank ING.All this is reminiscent of the blocking of the Suez canal by the Ever Given container ship two years ago, which caused mass problems for world trade and contributed to the worst inflationary burst for four decades.This time around, there are again warnings from European companies about empty shelves and higher prices, including from Ikea, Tesco and Aldi. Half of all toys imported and about two-fifths of homewares imported to the UK come from China, according to the consultancy Retail Economics. Tesla and Volvo have paused production because of component shortages at their European factories. Adding to the logistical meltdown, droughts have reduced crossings of the Panama canal between the Atlantic and Pacific.Economists, however, have so far been a little more sanguine than panicked media headlines might suggest.Unlike two years ago, the supply disruption takes place against a very different economic backdrop. Demand is faltering after higher living costs and elevated interest rates hit households. Global economic growth is forecast to slow sharply this year; capacity in world shipping has increased after the launch of several new, massive container vessels, while volumes of sea freight were already down before the disruption started.While container rates might have tripled, they remain far lower than two years ago. The Shanghai Containerized Freight Index, the most widely used index for sea freight rates for imports from China worldwide, is still down by more than half.Oil prices have risen sharply in recent days amid fears about the disruption to global trade through key shipping lanes, climbing to more than $80 a barrel. But they remain significantly below a peak of almost $140 in 2022 after Russia’s invasion of Ukraine. However, events could still change, especially if disruption is sustained or geopolitical tensions mount further.Ever since the Suez canal opened in 1869 it has been a linchpin for world trade and British interests in particular. Military intervention isn’t new: British warships have patrolled the 30km-wide Bab el-Mandeb strait for centuries, with the port of Aden forcibly seized in 1839 to establish an important coaling station on the passage to India.Once the second-busiest harbour in the world after New York, Aden’s significance has waned since Yemen’s independence in 1967, driven by decades of war and political crisis left in Britain’s wake, while advances in shipping have reduced the need for stopovers. Yet the choke point between the Horn of Africa and Arabian peninsula has remained strategically important for international trade since.As global energy prices increase once more, there should be particular alarm for Britain. After the Russian invasion of Ukraine, efforts to diversify gas supplies have increased the UK’s reliance on fossil fuel imports from the Middle East, including Qatar, the world’s largest exporter of liquified natural gas.European LNG imports rose by 71% in 2022 in the rush to replace Russian gas, including a 74% rise to the UK, which sources almost one-third of its imported supply from the country.Corporate executives and policymakers had been spending much of the past two years talking about decoupling and deglobalisation, amid a buzz around “reshoring” of supply chains from Asia closer to home. However, as the crisis in the Middle East shows, Britain is as addicted as ever to imports from Asia.Mainland China remains the top import source for about 70 economies around the world. While unpicking global supply lines built up over decades was hardly going to happen overnight, the west is still reliant on the country despite the political breakdown with Beijing.Official figures show 2023 was on track to be another near-record year for Chinese imports to Britain. Volumes have fallen from a record year in 2022, but still more than £50bn of goods arrived on British shores in the year to November, comfortably exceeding pre-Covid levels.After the succession of global shocks since the Covid pandemic, inflation had mellowed in 2023, raising hopes for interest rate cuts from the world’s most powerful central banks. It would have provided a helpful boost for living standards and economic growth in a key election year on both sides of the Atlantic.While the hope is that disruption will be minimised, that is far from guaranteed for Joe Biden and Rishi Sunak.

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