How the Houthi attacks in the Red Sea threaten the global economy
In the face of an already fragile global economy, there is a rising threat to destabilize one of the world’s key shipping routes.
Since mid-November 2023, the Houthi rebel group, based in Yemen and supported by Iran, has been targeting numerous commercial ships in the Red Sea, showing no signs of slowing down. The Houthis claim their attacks on Red Sea shipping aim to support Palestinians against Israel. At least 26 vessels have fallen victim to Houthi attacks so far, starting with the seizure of the Israeli-linked Galaxy Leader vessel in November.
Major shipping companies now warn of potential disruptions to supply chains and a possible rise in consumer prices. Although the Houthis initially targeted vessels associated with Israel, subsequent attacks targeted ships with little or no connections to Israel. Israel has also regularly denied any ties to the vessels attacked in the Red Sea.
On January 11, the U.S. and UK conducted airstrikes on over sixty Houthi targets in Yemen. U.S. President Joe Biden stated that these strikes would continue "as necessary" to safeguard the free flow of international commerce.
The Red Sea
The Red Sea connects Asia and Europe/Mediterranean through the Suez Canal, making it an important route in the global shipping network. Any prolonged disruption in this trade corridor has the potential to create a ripple effect, causing increased costs across the entire global economy.
On average, around 50 ships pass through the Suez Canal daily, carrying cargo valued between $3 billion to $9 billion. This canal facilitates about 30% of global container shipping, facilitating about 12% of global trade, equivalent to over $1 trillion worth of goods annually.
The impact of the Houthi attacks on the global economy
The chief negotiator for Yemen's Houthis said on January 15 that the group's position remains unchanged despite U.S.-led airstrikes, vowing to keep up with the attacks.
The disruption indirectly tightens the market, causing an increase in oil stocks on the water by 35 million barrels. This has led to higher global shipping costs, prompting cargo carriers to opt for longer and more costly alternate routes from Asia to Europe and the United States.
Oil prices rose by 2% in the early week of January in response to the escalating conflict, driven by increased fuel and manpower costs. Some of the world's largest shipping operators have rerouted their vessels around the Cape of Good Hope, incurring an extra $1 million in fuel costs and causing delays. Over 150 commercial ships have chosen the longer route since November.
Since the outbreak of the Middle East fighting, the cost of shipping a standard container from China to Europe has surged to over $4,700 from less than $1,000. While increased transport costs can contribute to inflation, during the pandemic, chaos in shipping routes led to an estimated 1 per cent increase in global inflation.
Major shipping companies such as MSC, Maersk, Hapag Lloyd, CMA CGM, and Evergreen have announced the immediate diversion of all scheduled journeys to ensure the safety of their crews and vessels. Together, these carriers account for approximately 60% of global trade. Conversely, insurance premiums for ships using the Red Sea have surged nearly tenfold since the attacks commenced.
