The current situation in the Suez Canal is tense due to attacks by separatist Houthis. These attacks, which began around mid-November, threaten one of the world's most important shipping routes, through which around 12% of world trade passes.
Separatists have been attacking merchant ships in the Red Sea, often using drones. This conflict affects not only the safety of ships, but also the overall logistics and economics of maritime transport. Shipping companies are trying to avoid the danger by taking the longer route around South Africa, but this means considerable delays and increased costs. The journey from China to the North Sea ports can therefore take twelve to fourteen days longer.
This conflict also has an immediate economic impact. Shipping costs are rising and this is expected to have an impact on shipping prices. For example, the journey from Shanghai to Europe is getting longer, and the cost of fuel and running ships is rising. The alternative route around Africa is considerably longer and more expensive, which will increase the total cost of transport.
Why is this now a problem?
Central banks have been battling post-Covidian inflation for two years. In recent months, macro data showed that inflation was receding, which was a signal for both the Fed and the ECB to stop raising interest rates. Markets were already pricing in a potential interest rate cut in March 2024, evidenced by the S&P 500 and Nasdaq 100 indexes climbing to All Time Highs. Either way, the situation in Suez is clearly inflationary. Higher costs will feed through to real consumer prices, and an early cut would cause prices to come under even more dramatic pressure. At the same time, the longer interest rates stay relatively high like this, the chances of crossing the threshold for the economy to manage to land without collapsing increase. It is to be hoped that the problem in the Suez Canal will not last long.