Date: 24.01.2024

Economic impact of Suez Canal diversions

For the UK and Europe fears are growing that any prolonged denial of access to the Suez Canal could impact faltering economies and derail plans to start cutting interest rates later this year.

Despite the confidence of European and UK central banks, uncertainties about the Red Sea crisis’ impact remain and prolonged denial of access to the Suez Canal could derail plans to start cutting interest rates this year.

No major impact from the Houthi attacks in the Red Sea has yet turned up in main economic indicators, including December inflation numbers, which ticked up only slightly.

The global economy is still performing below par, suggesting plenty of slack around the system.

Oil prices were the most obvious commodity to hit economies in Europe and beyond, but they haven’t surged because supplies haven’t been impacted and demand is slowing.

Less sanguine, the World Bank says the Middle East crisis, with the war in Ukraine, could still lead to surging energy prices, with broader implications for global activity and inflation.

Bangladesh is the world’s second-largest apparel exporter and garments are its main foreign currency earner. Ocean freight rates have gone up 40% from Chittagong to Europe and America, as a direct result of the security crisis in the Red Sea, with fears growing that buyers will begin to look for alternative sourcing.

Sea freight rates from India to the UK and Europe are up an astonishing 500% and there are some signs that the extended equipment turnarounds are leading to equipment scarcity, with fewer 40’ HC empties at busy ports, including Mundra and some inland container depots in northern India.  

Oxford Economics estimates that gains in container transport prices would add just 0.6% to UK inflation in a year. The ECB is expecting Euro zone inflation to fall from 5.4% in 2023 to 2.7% this year, with the BoE expecting UK inflation to average 2.4% in 2024, which suggests that a sustained closure of the Red Sea wouldn’t prevent inflation from falling, though it would slow the speed at which it returns to normal.

In the longer term, some companies may advance plans for alternative, more predictable supply routes, which could involve longer but more secure trade paths or “near-shoring” to bring production closer. 

Whichever options are considered, the likelihood is they will involve higher costs, and supply chain risk by its very nature is unpredictable.

Metro support our customers continuing success, by protecting their supply chains, with innovation and resilience, whatever the economic or operational challenges.  

Our unique blend of experience, systems and processes means that we can react quickly to overcome challenges or exploit opportunities; optimising global inventory, reducing costs and streamlining the supply chain. 

Please EMAIL Andy Smith to discuss how we can optimise your supply chain and help you overcome the issues you currently face.