Red Sea crisis exacerbates global economic outlook

The increased instability in the Red Sea will undoubtedly have significant global consequences. Here we will examine the impact of these events on the global economy without delving into political details.

The Houthi group of Yemen has confirmed that they will continue to prevent Israeli ships or those heading to Israel from sailing in the Red and Arabian Seas until the entry of food and medicine into the Palestinian Gaza Strip is allowed. The Houthis actively use drones and missiles against ships carrying goods through the 20-mile-wide Bab el-Mandab Strait that separates Eritrea and Djibouti on the African side and Yemen on the Arabian Peninsula.

It is a big deal because about 15 percent of global shipping and 30 percent of container traffic, including oil tankers and container ships, pass through the Red Sea each year. About 8 percent of all grain shipments, 12 percent of oil and 8 percent of liquefied natural gas pass through it.

Many logistics companies now send ships around the Cape of Good Hope, which is approximately 3,500 nautical miles longer, adding seven days to 18 days to a ship's journey, thereby increasing the complexity of the global shipping system. According to the International Maritime Organization, some 18 leading shipping companies have decided to reroute their ships around South Africa.

Rates for transporting goods by sea have increased sharply, returning to COVID times. According to the Drewry World Container Index, the price of a 40-foot container reached $3,072 on January 11, even before the U.S. and UK launched strikes on Houthi targets in Yemen. Last week, the Shanghai Container Freight Index, which measures shipping rates for imported goods from China, has risen 161 percent since December 15, from $1,029 to $2,694.

According to the trade maritime monitoring platform PortWatch, the number of ships these days crossing the Bab el-Mandeb Strait fell by 45 percent compared to a year earlier and in the Suez Canal by 28 percent. During the same period, traffic at the Cape of Good Hope in South Africa increased by 63 percent.

Thus, approximately 3.1 percent of global trade is diverted from the Red Sea to other routes. UN Conference on Trade and Development's latest global trade report, published before the events in the Red Sea, emphasized that prospects for 2024 remain "highly uncertain and generally pessimistic." This forecast now will have to be further reduced.

Several companies have announced plans to adjust their production plans due to severe supply chain disruptions. Tesla has decided to suspend production at German factories due to problems with components, with Swedish manufacturing corporation Volvo also stopping production at its plant in Belgium, while Britain's grocery chain Tesco has warned that the company may inflate the cost of some products, and IKEA said that deliveries to its factories were seriously affected.

End consumers have already started to feel the ongoing global disruption to international trade. Higher shipping costs and high energy prices risk rerunning global inflation, which has only begun stabilizing. Last week, JPMorgan warned that the fight against global inflation could stall if shipping costs push up commodity prices. In its January report, the World Bank also warned of slower economic growth and rising inflation due to deteriorating global trade conditions.

In this context, the relevance of rail freight should once again be noted. As the types of goods transported have changed over the years to include higher-value items such as phones, computers and semiconductors, the demand for faster rail transport has dramatically increased. On January 9, the China State Railway Group announced that despite a drop in global freight last year, the number of trains on the China-Europe route reached 17,000, up 6 percent from a year earlier, carrying 1.9 million twenty-foot equivalent containers (TEU). Given the growing instability of traditional maritime transport, developing alternative overland logistics routes between China and Europe by rail is becoming even more urgent.

The Red Sea crisis has exposed the profound interdependence of the global economy and the sensitivity of vital trade routes and supply chain reliability. The challenges facing maritime transport, which currently accounts for roughly 90 percent of all international cargo transportation, is a stark reminder of the interdependent nature of the world and the real consequences that instability can have on the global economic system. In our fragile and interconnected world, the need to create global security systems is increasingly urgent.

(The writer Djoomart Otorbaev, a special commentator on current affairs for CGTN, is a former Prime Minister of the Kyrgyz Republic, a professor of the Belt and Road School of Beijing Normal University, and a member of Nizami Ganjavi International Center).