Home MarketsEurope & Middle East Red Sea tensions threaten significantly higher inflation, OECD warns

Red Sea tensions threaten significantly higher inflation, OECD warns

by SuperiorInvest

High shipping costs as a result of current tensions in the Red Sea could impede the global fight against inflation, the Organization for Economic Co-operation and Development said on Monday.

The Paris-based group estimates that the recent 100% increase in ocean freight rates could increase import price inflation in its 38 member countries by almost 5 percentage points if they persist.

That could add 0.4 percentage points to overall price increases after a year, the OECD said in its latest economic outlook.

In late 2023, major shipping companies began diverting their ships from Egypt’s Suez Canal, the fastest trade route between Europe and Asia, due to a series of attacks by Iran-backed Houthi militants based in Yemen. Tensions remain high and the navies of countries such as the United States are involved in the conflict.

A cargo ship travels through the Suez Canal in Ismailia province, Egypt, on January 13, 2024.

Ahmed Gomaa | Xinhua News Agency | fake images

Ships are taking the longer Cape of Good Hope route around the southern coast of Africa, increasing journey times by 30% to 50%, removing capacity from the global market.

However, the OECD also notes that the shipping industry had excess capacity last year, as a result of orders for new container ships, which should moderate cost pressures.

Clare Lombardelli, chief economist at the OECD, told CNBC on Monday that a sustained rise in inflation as a result of the latest crisis is a risk, but it is not the group’s base case.

“It’s something we’re watching closely…we’ve seen an increase in shipping prices, if that were to continue for an extended period of time then it would translate into consumer price inflation. But at the moment, we don’t anticipate that that will be the case,” Lombardelli said.

According to Tiemen Meester, chief operating officer of Dubai-based logistics company DP World, European imports present the biggest challenge and have experienced significant delays to cargo that was already on its way.

“Unfortunately, inefficiencies in the network come at a higher cost, so ultimately rates are going up. But they’re actually nowhere near where they were at their peaks during Covid… How will those costs get there?” to the consumer? We’ll have to see,” Meester told CNBC, describing it as a “short-term issue.”

“I think where we are now is a stable state, because the networks have tightened and the cargo is flowing, the reserves are taking, it just takes longer,” he added.

Red Sea crisis: DP World Group COO says biggest challenge is European imports

The OECD’s Lombardelli said there has generally been positive data among its members in recent months showing inflation is falling consistently. This will help rebuild real incomes and support consumption, he said.

The 38 members of the OECD include the United States, the United Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan and South Korea.

Its latest outlook raised its economic growth forecast for the United States by 0.6 percentage points from its previous estimate in November, to 2.1% for this year. His outlook for the euro zone was lowered by 0.3 percentage point to 0.6%, while his outlook for the UK was stable at 0.7%.

“We’ve seen positive news in the United States, we’re seeing inflation coming down now, but we don’t see a big cost in terms of the labor market there,” Lombardelli told CNBC.

“Growth looks stronger and inflation is coming down. So we will see a rebuilding of real incomes in the United States, and that will support consumption growth.”

Europe has been hit hardest by a shock to energy prices, the impact of inflation on real incomes and consumption, and its greater reliance on bank financing amid tighter variable policy, he said.

In the medium term, the OECD expects a greater drag on growth due to its aging workforce.

However, the OECD believes the European Central Bank is in a position to cut interest rates in the second half of the year if current trends continue, Lombardelli said.

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