The Red Sea Crisis Impacts the Global Economy

One of the world’s major trade arteries, the Red Sea, is effectively shut down for an overwhelming majority of container ships. These vessels transport diverse goods ranging from car parts to Crocs globally. The escalating crisis is causing significant disruption in worldwide supply chains and potentially exacerbating inflation during an already critical period.

The Red Sea waterway, connecting with the Suez Canal, serves as an essential trade passage. It manages a significant portion of worldwide trade, including oil exports. Notably, it accounts for 10% to 15% of all global trade and 30% of container shipping volumes worldwide.

An ongoing feud is the root of this crisis, and despite increased maritime security measures by the U.S. military and allies, the opposing militants continue their offensive. The impact of this persistent strife on the global economy is increasingly palpable. Germany’s Kiel Institute for the World Economy reported a drop of 1.3% in global trade from November to December. They attributed this decrease to the assaults on cargo ships in the Red Sea.

Businesses are encountering notable challenges due to the crisis. Retailers are grappling with shipment delays while the costs of sea freight are on the rise. The World Bank, in its biannual report, issued a warning that the disruption to crucial shipping routes is causing supply network stress and amplifying the risk of inflationary bottlenecks.

The threat from the Houthi militants has driven six out of the top 10 container shipping companies to largely abstain from using the Red Sea route: Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM, and ONE.

The safety of crew, cargo, and vessels is paramount, so carriers are rerouting ships around South Africa’s Cape of Good Hope. This change results in significant delays — up to three weeks. According to Maersk CEO Vincent Clerc, restoring safe transit through the Red Sea might take months. He cautioned that this could have significant repercussions on global economic growth.

The Red Sea crisis underscores the interconnectedness of our global economy and the vulnerability of critical trade routes. The extended closure of this vital waterway serves as a stark reminder of the unseen but tangible ripple effects reverberating through the world’s economic systems.