What’s happened?

Global sea freight rates have risen rapidly as a result of security disruptions in the Red Sea. We expect rates to stabilise around mid-February as trade demand, which was frontloaded in advance of the Lunar New Year (February 10th), records a seasonal fallback following the shuttering of factories in Asia. Although global shipping rates will remain elevated in the coming weeks, we continue to expect this to have limited long-term pass-over into the global inflation and trade landscape.

Why does it matter?

The impact of the recent disruptions to global trade flows looks mixed. Some Asian exporters may be disproportionately affected by softer external demand, tied to costlier transport options that avoid the Red Sea, as well as higher maritime insurance risk premiums. Disruptions to certain industries like automotive production may persist over the coming weeks. European economies remain exposed to potential price shocks, given that the most affected shipping routes are those traversing the Bab-el-Mandeb strait, the epicentre of the Houthi attacks. 

There are nevertheless some signs that the spillover effects of the conflict may not be as severe as originally feared. On the inflation front, only about 20% of the EU’s imported goods traverse the Suez Canal, with related transport costs representing only a small percentage of input costs for European manufacturers. Moderating energy prices should offset inflationary pressures coming from higher shipping costs, supporting our view that the current disinflationary trends will continue. 

Export data from South Korea and Vietnam also show strong expansion in January, despite the Red Sea disruptions (the year-on-year export growth data were partially flattered by a low base of annual comparison from 2023, but month-on-month performance was robust). Some export industries with heavy exposure to European demand, such as textiles, remain at risk of disruption. However, US demand may insulate some Asian economies from the conflict. Our global trade forecasts already assume that US economic growth will outstrip the EU’s in 2024, suggesting that US demand will be a larger factor in shaping Asian export growth this year, regardless of the Red Sea disruptions.

What next?

This assessment does not mean that the trade risks emanating from the Red Sea conflict have dissipated. We expect Houthi attacks to persist for as long as the conflict in Gaza endures—probably at least until end-2024. In addition, the seasonal resumption in trade activity after the Lunar New Year also suggests a risk of another spike in regional and global shipping costs, which could depress trade activity . We nevertheless expect firms to counteract these effects by building longer or alternative transport routes into their strategies, which will limit the macroeconomic fallout from these developments.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.