AnalysisHow Houthi attacks are shaping the new economic landscape
Analysis
How Houthi attacks are shaping the new economic landscape
Should the attacks by the Houthis persist, the crisis may increase inflation and delay interest rate cuts. Even if the disruptions in the supply chains do not reach the level experienced during the pandemic they could damage stability
"The Houthi attacks on ships in the Red Sea are a worrying step towards an escalation of the conflict in the Middle East. The effects on supply chains and inflation may cause some short-term disruptions, but we believe they will be largely manageable - unless a regional war breaks out leading to the use of energy resources as a weapon against the West through restrictions on the rights of passage of oil and gas tankers in the Strait of Hormuz," S&P economists wrote in a special review they devoted to the subject more than a week ago.
According to the same review, about 30% of the maritime transportation of crude oil and 20% of the maritime transportation of liquefied gas pass through the strait connecting the Gulf of Oman in the Indian Ocean with the Persian Gulf. "So any partial closure will lead to a significant disruption to the world market and will not be welcomed by important trade partners of the oil producers in the Gulf such as China and India," they noted.
1. Gas and oil - the two most important energy commodities in the world that enable the functioning of modern economies are not the whole story. The disruptions are already felt in almost all industries: from automobiles to fashion. After all, the route being affected by the Houthis accounts for more than a tenth (between 10-12%) of the global maritime trade. The situation in the Red Sea and the Straits of Hormuz has already changed: Western forces (the US and the UK) have already carried out airstrikes in the region after 25 attacks were registered by the terrorist organization that caused quite a few companies to avoid using this route, and to extend the arrival time of goods by about 40%, from - 25 to 35 days.
The disruptions make one of the main costs of the goods more expensive - the transport - and naturally also increase the insurance prices against the background of the new threats. This is already reflected in the sea transport prices according to every possible parameter. The SCFI index, which reflects the cost of maritime transport and the associated charges of individual shipping routes from China to almost every port in the world, has jumped from a level of under $1,000 per TEU (container measurement unit) until a few weeks ago in November 2023, to more than $3,000 in the last week.
The cost of shipping from China to the Middle East took an even more extreme route: from $1,200-$1,300, to a level that has already crossed the $4,500 mark, which complicates the central banks' efforts to reduce inflation. We should also pay attention to another index, the FBX, which shows the price of transportation from China and East Asia to the Middle East. After reaching a peak in 2022 following the surge in demand after the pandemic to a level of about $14,500, it returned to levels of $1,380 in the week after the October 7 attack. Since then, it rose to $6,500.
According to recent data from the CBS, Asia (including China) accounts for 27% of Israel's imports compared to just 10% from the USA. Europe still leads the way, with a third of all imports still coming from there). The conclusion is obvious: it is true that during the pandemic the situation was much worse, but this does not mean that the current developments in the Red Sea are positive and not even close to it.
2. "Even if there is no lasting shock in the supply of energy or food, then disruptions in the supply chains and the imposition of the increase in costs, including energy, on the final product, may make it difficult for the central banks to restore price stability and require a recalibration of the rate of interest rate cuts that the market has already priced in," S&P explained. One person who already noticed this, and even emphasized it, is Bank of Israel Governor Prof. Amir Yaron. "World trade is below average and this affects Israel as well."
3. There is no vaccine against these long-term trends. That is, this disruption, even if it is smaller in scope compared to the pandemic, may last for longer. We may witness more incidents of maritime terrorism that will increase prices, disrupt supply chains and therefore unexpectedly increase inflation. Because, as we are already witnessing, this jump is felt in a wide range of sections in the index: from energy to vehicles, and also in many services such as electricity, gas, hotels and restaurants (leisure). In far-reaching cases, we will even see companies that are unwilling to transfer goods and raw materials, and this will disrupt the supply chains even further.
Although the economic literature shows that interest rates are much more effective in curbing the inflation of services, commodity inflation will certainly delay the process of lowering the interest rate, which is so necessary for global growth as a whole, but especially for the Israeli economy, which needs monetary relief in order to recover from the disaster of October 7 and the war in Gaza.
