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Sailing through storms: The fallout of Red Sea disruptions for global trade and inflation

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The Houthi attacks in the Red Sea have significantly disrupted maritime trade, particularly affecting the Bab-el-Mandeb Strait, a vital route for global oil and seaborne trade. 

Since December 2023, shipping volumes through the strait have decreased by 70%, leading major shipping companies to halt operations in the area. Despite these disruptions, the economic impact on global trade and inflation remains relatively modest due to factors such as spare shipping capacity, low port congestion, subdued global demand, and adequate inventory levels.

Oil prices experienced initial volatility following the attacks but have since stabilized below pre-attack levels, partly because not all oil companies suspended operations. Higher shipping costs and rerouted vessels, which now travel around the Cape of Good Hope, extending journeys by 10-14 days, have had limited overall economic effects. The current state of global supply chains, characterized by high inventory levels and newly available shipping capacities, has cushioned the impact on trade volumes and shipping costs.

VAR model simulations indicate that even under a protracted disruption scenario extending to the end of 2024, the decrease in global trade would be minimal: 1.3 percentage points in 2024 and 0.5 percentage points in 2025. The euro area, with its higher exposure to the Suez Canal disruptions, would see a larger impact, with export growth decreasing by 1.6 percentage points in 2024 and 0.9 percentage points in 2025.

Inflation effects are also muted. Under short-lived disruptions, global inflation would rise only by 0.04 percentage points in 2024, while the euro area would see a 0.07 percentage point increase. Protracted disruptions would have a slightly higher impact, raising global inflation by 0.18 percentage points in 2024 and the euro area by 0.30 percentage points.

The analysis concludes that current economic conditions—spare shipping capacity, high inventories, and subdued global demand—are mitigating the impacts of the Red Sea disruptions. However, these disruptions highlight the need for resilient supply chains amidst rising geopolitical tensions.

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Source: CEPR