A prominent economist has warned that following attacks on ships utilizing a crucial trade route across the Red Sea, inflation may spike once more.
Although there was less of a disruption to shipments than there was during COVID, Mohamed El-Erian cautioned that it would still raise costs and slow economic growth.
Following strikes by Houthi rebels in Yemen, a number of maritime companies have discontinued sending vessels along the Red Sea route.
The US and the UK began military operations against the Houthis last week.
Dr. El-Erian, senior economic adviser at financial services behemoth Allianz and principal of Queens College, Cambridge, stated on the BBC’s Today program that “we will see higher inflation, higher mortgage rates, and lower growth relative to what would have happened otherwise.”
But as compared to what we had in 2021 and 2022, it is absolutely nothing. Though it is regrettable, this shock won’t be as severe.”
The Bab al-Mandab Strait, which divides Yemen on the Arabian Peninsula and Eritrea and Djibouti on the African side, is a 20-mile-wide passage that is used by 12–15% of the world’s trade to pass across the Red Sea.
Iran-supported Following the commencement of the Israel-Hamas conflict in October of last year, Houthi rebels started using drones and missiles to target commercial vessels.
The attacks resumed on Monday despite intervention by Western countries, when a US-owned cargo ship was targeted by a missile off the south coast of Yemen, according to British maritime security firm Ambrey.
The Cape of Good Hope in Africa is currently being avoided by large maritime companies, which can add up to 12 days to the transit time for cargo between Singapore and northern Europe.
The shipping behemoth Hapag-Lloyd claims that the wait might be up to eighteen days for ships traveling from Singapore to the east Mediterranean.
The UK’s inflation rate, which gauges how quickly prices are rising, dropped significantly from highs of 11.1% in October 2022 to 3.9% in the month of November.
The war between Russia and Ukraine had increased inflation, particularly in the price of food and oil.
Nearly 15% of products imported into Europe, the Middle East, and North Africa are transported by water from Asia and the Gulf, according to S&P Global Market Intelligence. More than 13% of crude oil and 21.5% of refined oil are included in that.
Following the US and UK’s military operation against the Houthis in Yemen last week, Brent crude, the global benchmark for oil prices, reached $80 per barrel. However, it has since dropped to $77.75 on Monday.
Because of lower demand and an oil glut, according to Ashley Kelty, director of oil and gas research at Panmure Gordon, markets had been “less rattled” by developments in the Middle East.
He cited concerns that China’s oil demand will soar if the Covid limitations were abolished as one contributing cause. Mr. Kelty remarked, “But China has not recovered at the pace expected.”
Another crucial shipping route for LNG (liquefied natural gas) is the Red Sea.
Reports arose on Monday that QatarEnergy, a major producer of LNG, has ceased transporting ships through the Bab el-Mandeb Strait. Five vessels have been halted since Friday, according to Bloomberg.
On Wednesday, the most recent inflation estimate for December will be made public.
In an effort to curb inflation, the Bank of England has raised interest rates along with other significant central banks.
Financial markets have been anticipating that it would start to lower borrowing charges this year as inflation appeared to be coming back towards the Bank of England’s 2% objective.
Andrew Bailey, the governor of the Bank, cautioned in December that it was “too early” to make any assumptions regarding rate reductions.
According to Dr. El-Erian, some people may see an increase in mortgage expenses if inflation does not decrease or even pick up and the Bank does not lower interest rates.
A quarter of a million mortgage holders will see their fixed-rate agreements expire in 2024, as reported by the City regulator, the Financial Conduct Authority.
As for the global supply of commodities, there may be further disruption on February 10th, when Chinese manufacturers close for the Lunar New Year.
According to Dr. El-Erian, some people may see an increase in mortgage expenses if inflation does not decrease or even pick up and the Bank does not lower interest rates.
A quarter of a million mortgage holders will see their fixed-rate agreements expire in 2024, as reported by the City regulator, the Financial Conduct Authority.
As for the global supply of commodities, there may be further disruption on February 10th, when Chinese manufacturers close for the Lunar New Year.
Dr. El-Erian expressed his concern. “We are facing significant headwinds, we are living in a new reality where the supply side of the global economy is much more fragile which means inflationary tendencies are greater than they used to be.”
Hapag-Lloyd reported that the extra fuel required to reroute ships around the Cape of Good Hope was costing millions of dollars. On December 21, the company halted its ship operations through the Red Sea.
Nils Haupt, its spokesperson, stated: “Not only do we need more fuel, of course, but we are also speeding up to save some time and speeding up also costs additional fuel so this is, for us, monthly high two-digit million amount of dollars.”
“All different measures that help us to get rid of terrorism and to continue our peaceful journey with commercial ships is helping,” he said in response to a question about whether the US and UK attacks will bring shipping back to normal levels.
“But if this attack that we have seen last week is really helpful, that is still to be seen.”