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EU price rises ahead? Expert insight on economic impact of Red Sea tensions

Houthi attacks in the Red Sea have disturbed vital trade routes connecting Europe, the Middle East and Asia. Euronews Business spoke to Dr. Yousef M. Alshammari, Senior Research Fellow at Imperial College London, to explore the consequences for the European and global economy.

The Houthi, a rebel movement in Yemen, has been attacking merchant ships in the Red Sea for over two months now, impacting a crucial waterway that represents 12% of global trade traffic – and there’s concerns the growing tensions could impact the course of inflation as energy prices fluctuate.

For the majority-Shiite Islamist group, the vow has been clear: to join the Hamas-Israel war, protect Palestinians, and target all vessels bound for Israel by launching missiles and naval drones.

Equally evident is the impact that the attacks are having on shipping in the Suez Canal, which has been facilitating trade between Asia, Europe, and the Middle East since 1869, and the consequential impact on global trade.

In January, only 200,000 standard containers were moving through the canal daily, compared to approximately 500,000 containers in November, as reported by the German think-tank Kiel Institute.

The fear resulting from the attacks has prompted major shipping companies to change their routes, opting for the longer journey around the Cape of Good Hope, situated on the Atlantic coast of the Cape Peninsula in South Africa.

Alternative routes can add an extra ten days when avoiding the Suez. These delays not only impact the supply chain, causing bottlenecks at ports, but the longer route also results in ships burning more fuel, increasing the industry’s environmental impact and pushing up prices, as reported by The Economist.

According to the Freightos Baltic Index (FBX), the price of shipping a regular container increased by 146% in the 30 days leading up to 17 January, with expenses which might result in consumer prices going up.

To explore the potential impact of disruptions on Europe and the global economy, Euronews Business spoke to Dr. Yousef M. Alshammari, senior research fellow at Imperial College London and chief executive and head of oil research at CMarkits.

The Red Sea crisis: A potential billion-euro loss for the EU
According to Dr M. Alshammari, the crisis is a direct “threat” to European-Asian trade, resulting in billions of dollars in costs.

“Initial estimates indicate potential losses of up to 135 billion euros in commercial exchanges between Spain and Asia which has a direct impact on the EU economy,” he said.

Maritime transport is crucial for EU-China trade, constituting 90% of their exchange. In 2022, Eurostat data showed that the EU imported €626 billion worth of goods from China, with exports reaching €230 billion.

The Netherlands topped EU member states in importing from China €138.8 billion worth of goods, followed by Germany at €130 billion, and Italy at €57.5 billion. Czechia had the highest share of China in its extra-EU imports, standing at 47.7%, with goods including telecommunications equipment, automatic data processing machines, electrical machinery, and organo-inorganic compounds.

The top three exporters to China were Germany (€106.85 billion), France (€23.7 billion), and the Netherlands (€18.7 billion).

Certain sectors are anticipated to be more affected by the crisis than others.

“At this stage, agriculture commodities and marine foods are expected to see maximum impact due to the perishable nature of their products, and lean margin profiles, which makes them less capable to withstand rising freight cost,” Dr M.Alshammari said.

Oil price and inflation surge: Two elements that go hand in hand
Over the weekend, a drone attack targeted the Tower 22 US base on the Jordan-Syria border, resulting in the death of three US troops and injuries to several others.

Following the attack, crude oil prices showed a slight increase of 0.27% to reach $78.2 (€72.2) on Monday morning, marking a weekly rise of 4.73%. Similarly, Brent crude oil prices experienced a 0.05% uptick to $82.9 (€76.6), with a weekly gain of 3.70%.

The trade route is responsible for 12% of global seaborne oil and 8% of liquefied natural gas (LNG).

The geopolitical instability and tensions between Iran and the US will only keep pushing oil prices higher as the uncertainty in the Middle East continues to rise, according to Dr M. Alshammari, triggering an increase in inflation.

“I think a rise in oil prices will make inflation above 3% in H1 2024 and possibly slightly less in H2 2024 if the European Central Bank (ECB) and the Federal Reserve (Fed) keep rates fixed to achieve the 2% target,” Dr M. Alshammari said.

“This is particularly not good news as Europe already had issues with gas imports given the war in Ukraine and the existing high natural gas demand in winter. It means energy efficiency must be a top priority for consumers.”

He also noted how the ongoing events could result in higher mortgage/loan rates for longer and moderate increases in food prices, especially those imported from Asia, like rice, for example.

The EU response
Earlier this month, Brussels announced its plan to start a special EU mission, aiming to safeguard commercial ships in the Red Sea.

The EU’s diplomatic service suggests deploying “at least three” warships with “multi-mission capabilities” to the area as soon as next month, in a document seen by Euronews.

Meanwile, European Commissioner for Trade, Valdis Dombrovskis, warned that, despite the current containment of the effects of these disruptions, there is ‘a risk for the European economy’ which needs to be “monitored closely”.

“I think, meanwhile, it’s very important to reroute ships carrying various commodities to Europe. It entails higher fuel costs, insurance, etc., but that is a short-term situation,” Dr M. Alshammari noted.

For the senior research fellow, the crisis is a concerning situation where the US is currently taking the lead, and the conflict in Gaza is complicating the situation.

“The US airstrikes won’t cease until the maritime traffic in the Red Sea is secured, possibly leading to an increase in military actions. The conflict in Gaza adds another layer of complexity to the situation,” he added.
Source: Euronews

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