Red Sea Clashes Risk Adding 5% to Import Costs, Pushing Up Inflation
By April Fowell
Prolonged strains in the Red Sea leading to increased transportation expenses may impede the global effort to combat inflation, warns the Organization for Economic Co-operation and Development (OECD).
The OECD predicts that if the 100% surge in seaborne freight rates continues, import price inflation across its 38 member nations could rise by about 5 percentage points, contributing 0.4 percentage points to overall price increases after a year.
Major shipping companies rerouted boats away from the Suez Canal due to attacks by Iran-backed Houthi terrorists in Yemen, resulting in longer voyages around Africa's southern coast. The OECD notes that the shipping sector has extra capacity from new container ship orders, which may alleviate pricing pressures.
Increased transportation expenses resulting from prolonged strains in the Red Sea may hinder the worldwide effort to combat inflation, the Organization for Economic Co-operation and Development stated on Monday.
According to the Paris-based organization, if the recent 100% surge in seaborne freight rates continues, import price inflation in each of its 38 member nations may soar by about 5 percentage points.
The OECD stated in its most recent economic forecast that after a year, this may contribute 0.4 percentage points to overall price increases.
Due to a wave of attacks by Iran-backed Houthi terrorists headquartered in Yemen, major shipping companies started rerouting their boats away from Egypt's Suez Canal, the shortest commercial route between Europe and Asia, in late 2023. With several nations' navies participating in the fighting, including the US, tensions are still high.
Ships are circumnavigating Africa's southern coast via the Cape of Good Hope route, which lengthens voyages by 30% to 50% and depletes market capacity worldwide.
The OECD also point out that the shipping sector has extra capacity last year as a consequence of orders for new container ships, which could lessen pricing pressures.
OECD Economists Monitor Inflation Risks Amidst Shipping Challenges
Clare Lombardelli, chief economist at the OECD, emphasized on Monday that while a sustained increase in inflation due to the current crisis is a potential risk, it is not the organization's base case scenario. She stated that they are closely monitoring the situation, particularly the rise in shipping prices, acknowledging that if this trend persists, it could feed into consumer price inflation. However, Lombardelli clarified that, at present, such a scenario is not anticipated.
Tiemen Meester, the chief operating officer at DP World, a Dubai-based logistics firm, pointed out that European imports are posing significant challenges, causing substantial delays in cargo that was already en route. Meester acknowledged higher costs resulting from inefficiencies in the network, leading to an increase in rates. However, he emphasized that the current situation is a "short-term problem" and noted that the current rates are not as high as they were during the peaks of the Covid-19 pandemic. Meester described the present state as a "steady state," indicating that networks have adjusted, and while cargo is flowing, the process simply takes more time.
According to Lombardelli of the OECD, aggregate data from its members in recent months has shown a sustained decline in inflation. She said that doing this will boost consumption and help restore real earnings.
The United States, the United Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan, and South Korea are among the 38 nations that make up the OECD.
According to its most recent prediction, the United States' economic growth is expected to expand by 2.1% this year, up 0.6 percentage points from its previous estimate in November. Its prognosis for the euro zone dropped to 0.6%, or 0.3 percentage points, while its U.K. The forecast was 0.7% flat.
According to her, the shock to energy prices, the effect of inflation on real earnings and consumption, and Europe's increased reliance on bank-based financing in the face of tighter monetary policy have all hurt the continent more than before.
The OECD projects that its aging workforce will have a more negative impact on GDP in the medium future.
Nonetheless, Lombardelli stated that if present trends continue, the OECD believes the European Central Bank would be able to lower interest rates in the second half of the year.