Supply chain challenges have resurfaced. Just as the global economy appears to be moving beyond the disruptions caused by the pandemic, Iranian-backed Houthi rebels have initiated over 30 attacks on ships traversing the Red Sea. This crucial maritime passage typically handles approximately 15% of global maritime trade, including 8% of grain shipments, 12% of crude oil, and 8% of liquefied natural gas (LNG).
In response, major shipping companies have redirected vessels around the Cape of Good Hope, resulting in increased time and expenses for shipping routes. As of the beginning of this year, freight capacity in the Red Sea had declined by 63% from mid-October levels, according to the Kiel Institute for the World Economy.
Subsequent delays have ripple effects, leading to port congestions and less predictable ship availability. The extended voyage, lasting anywhere from an additional 10 days to two weeks, also raises fuel and labor costs. Moreover, insurance premiums for some vessels in the region are on the rise. Consequently, shipping rates along the Shanghai-Rotterdam route have surged by 153%. Ultimately, these expenses will trickle down to consumer prices, exerting pressure on inflation at a time when central banks appear to be making strides in this area.
Given these circumstances, will the Red Sea challenges significantly affect Canada? Thus far, it appears that the economic ramifications of the Middle East conflict have been mostly contained, with energy markets remaining relatively stable (a topic perhaps worthy of future exploration). However, this is not to say that crude oil prices couldn’t spike in the event of a broader conflict. Additionally, as geopolitical tensions escalate, heightened global risk aversion could widen spreads, further tightening global financial conditions. A full-scale war would also dampen confidence more broadly, leading to a decline in global demand.
Learn more here: https://www.edc.ca/en/trade-matters/supply-chain-challenges-red-sea.html
