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What Is The Economic Impact Of The Red Sea Disturbance On Europe?

What Is The Economic Impact Of The Red Sea Disturbance On Europe?
The fastest sea route between Asia and Europe, which carries 12% of the world's container traffic, the Suez Canal, has been blocked by weeks of attacks on vessels in the Red Sea by militants backed by Iran.
Prolonged disruption would be a new risk to the European economy's outlook, which is just edging out of a minor recession as it struggles to overcome high inflation. It might also jeopardise central banks' intentions to start decreasing interest rates this year.
As they evaluate the situation and its ramifications, officials are taking into account the following factors.
What effect has it had thus far on the economy of Europe?
little to nonexistent from a macroeconomic perspective. This week, the German Economy Ministry stated that, despite its emphasis on monitoring the situation, the only discernible impact on output thus far had been a few instances of extended delivery delays.
Chief of the Bank of England Andrew Bailey agreed, saying during a parliamentary hearing that it "hasn't actually had the effect that I sort of feared it might" but that there were still uncertainties.
The assaults have not yet had an impact on Europe's key economic statistics, such as the region's December inflation figures, which increased little due to a combination of pressure on service prices, some one-off events, and statistical factors that were mostly expected.
That could change if you pay attention to the preliminary PMI readings for the activities of the European economy in January on Wednesday and the first estimate of the euro zone's inflation for the same month on February 1. The topic may come up during ECB President Christine Lagarde's news conference following the rate-setting meeting on Thursday.
However, why hasn't it yet had an impact on the economy?
The primary cause is presumably the fact that there is a lot of slack in the system because the world economy is still doing poorly overall.
Consider oil prices, which are the most obvious way that economic issues in the Middle East could affect economies in Europe and beyond.
The reason they haven't taken off yet is that supplies are steady and demand growth is decreasing, as executive director of the International Energy Agency Fatih Birol told Reuters this week.
"I don't expect a major change in the oil price because we have an ample amount of oil coming in the market," he said.
Because the world economy was "not really pumping yet," German logistics behemoth DHL stated that it still had sufficient air freight capacity. However, this was not an option for everyone.
It is also more difficult for businesses to pass on cost increases to customers as a result of this muted economic outlook, such as the need to reroute around Africa. Many of them realise they might just have to give up this one because they have rebuilt margins over the last year.
"Our best forecast at the minute is we're able to absorb the incremental cost that we estimate will come through and still achieve ... gross margin improvement," Poundland owner Pepco Group's executive chairman Andy Bond told Reuters.
Furniture store IKEA even said that it had enough stock to withstand supply chain disruptions and would adhere to scheduled price reductions. The disruption won't affect the rate of increase in consumer prices as long as that holds true for a sufficient number of businesses.
Can European decision-makers just skim this then?
No, since even though it happens gradually, a longer disruption is more likely to have an impact on the overall state of the economy.
Oxford Economics calculated in a note dated January 4 that increases in container transport pricing would cause inflation to rise by 0.6 percentage points in a year, based on an IMF assessment of the impact of freight and new equipment cost changes.
Inflation in the euro zone is predicted by the ECB to drop from 5.4% in 2023 to 2.7% this year.
"While this suggests that a sustained closure of the Red Sea wouldn't prevent inflation from falling, it would slow the speed at which it returns to normal," Oxford Economics concluded.
However, it did not see this impeding an anticipated turn towards lower interest rates.
In the margins, one of the "geopolitical risks" mentioned in the minutes of central bankers' monetary policy meetings is the Houthi attacks and broader problems in the Middle East. The worry is that things will get worse, and that worry could influence the choices that are made.
Lastly, although this may still be a while off, there's a chance that the circumstances will push businesses to move forward with plans created in the wake of the COVID-19 outbreak that halted trade in search of more reliable supply routes.
This may entail "near-shoring" or "re-shoring" in order to move production closer to important markets, as well as longer but more secure trade routes.
However, it's likely that any solution that is investigated will have one thing in common: increased expenses.

Christopher J. Mitchell

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