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THE CONFLICT IN THE RED SEA AND ITS POSSIBLE IMPACT ON THE ECONOMY



A new actor has appeared in the conflict between Israel and Hamas: the Houthis. This is an insurgent group from Yemen; They are one of the most important actors in the ongoing civil war in that country.


Why is this armed group so important? Basically, because it has cut off the Bab El Mandab strait, one of the entrances to the Red Sea. And you have to pass through this strait to cross the Suez Canal, through which around 10% of world naval trade passes.




In this graph you can see the increase in travel distance on a journey between India and London: 70%. Between China and Europe, the increase is 40% and between the Persian Gulf - where the oil tankers that supply Europe depart - the increase is close to 90%.


This route mainly circulates trade between Europe and China/India and oil from the Persian Gulf destined for Europe.


The cost of shipping a container from China to Europe was around $1,500 before COVID. Distortions in international trade caused by COVID caused the price to skyrocket, as reflected in this graph, where the yellow line reflects the cost of shipping a container from China to Europe.




Before the current crisis, the price was around $1,400 – $2,000; Although it is difficult to predict how high the price may rise, shipping companies are rising on the stock market by more than 15%.


The effects of these delays will be the following:


1.- As the travel time of each ship increases, the number of trips it can make decreases, and therefore the amount of merchandise transported decreases. This raises its price, and therefore inflation may rise if the situation continues.


2.- The fuel consumption of ships increases; In addition, less fuel reaches Europe. The price of oil in Europe will rise. It can push up inflation if the situation continues.


3.- In 2021, the Suez Canal was closed for a few days due to a ship accident. Daily losses in 2021 were $9.6 billion; current losses should be similar. These losses are deducted from the GDP of the countries involved.


4.-Geopolitical tension increases. In the short term, it implies an increase in the price of insurance and an increase in defense spending. Not to mention the possibility of some kind of low-intensity conflict: once naval trade is diverted, there is the possibility of the Houthis being attacked. On the other side of the strait, in Djibouti, there are eight military bases of various powers (USA, China, etc...). For now, it seems that the military response will be merely aimed at keeping the sea route open.


If the situation remains stable and there is no military conflict, what we can expect is an increase in the prices of products imported from Asia and oil. As a result, if the situation continues, there may be a rise in inflation, which would mean that the long-awaited rate drop would be delayed or not occur.



The H&B team.

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