Red Sea trade disruptions add to costs

From Challenger Chief Economist Dr Jonathan Kearns

The targeting of shipping in the Red Sea by Yemen’s Houthis has disrupted a key shipping route that accounts for 25-30% of global container trade (about 12% of global trade). This will add to freight costs, predominantly for Europe but to a lesser extent also the United States and Asia, just as central banks have been making significant gains in their fight with inflation.

While the United States and allies have sought to protect shipping in the Red Sea, many carriers have stopped using the route given the risks. Some insurers are not covering ships against war risks if they pass through the southern Red Sea. As a result, shipping using Red Sea ports has fallen by some 60%. Alternate routes take longer and so will add to costs.

The cost of shipping for routes that do not pass through the Red Sea (US to Europe and west coast US to Asia) are little changed.?By contrast the cost of those routes that pass through the Red Sea (Asia to Europe and the east coast of the United States) has more than doubled given alternate routes are much longer. While shipping costs still remain much lower than pandemic peaks if they are sustained at these levels it will add slightly to inflation in Europe and to an extent the United States adding uncertainty to the outlook for central banks’ policy rates.

About Challenger

Help secure your clients’ future, with guaranteed income solutions for life’s different stages from Challenger. Find out more here.