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Understanding Impact of Suez Canal Crisis on Global Economy

The ongoing Red Sea crisis, marked by Houthi fighters lunching attacks on ships in the Suez Canal, has raised concerns about its potential impact on global prices of goods. However, there are several factors suggesting that the disruption may not have a significant effect on inflation.


Even in a worst-case scenario where the Suez Canal remains impassable for the entire year, experts argue that global container ship capacity would only reduce by approximately nine percent. This is attributed to the substantial number of ship orders placed during the post-2020 pandemic-era boom. The market is expected to remain "heavily oversupplied," limiting the overall impact on costs throughout the supply chain.


Much of the concern centers around spot freight rate increases, which measure the cost of getting a container onto the next available voyage. However, the bulk of shipping costs are contractual rates, agreed upon over terms of a year or more. These rates are less volatile than spot rates, providing stability and potentially mitigating the short-term impacts on inflation.


In 2021, when spot freight rates surged by 900 percent, the impact on inflation was minimal, only contributing "just a few tenths of a percentage point." The current situation differs significantly, as the global economy is now facing lower consumer confidence after inflation surges and interest rate hikes over the past 18 months. This weaker demand picture may limit the potential inflationary effects of increased shipping costs.


Following the disruptions caused by the COVID-19 pandemic, firms have taken measures to secure their supply chains. They have increased stockpiles and re-evaluated the efficiency of their 'just-in-time' supply networks. This enhanced resilience in global supply chains provides extra capacity compared to the post-pandemic era, making it easier for manufacturers to obtain key parts and commodities.


While the Suez Canal disruption is a concern, the real risk for a resurgence in inflation is seen in a major escalation in the Middle East, particularly if Iran becomes directly involved. The potential disruption to energy supplies, with estimates suggesting that a significant portion of OPEC oil production passes through the Red Sea, could have a more substantial impact on global markets.


The oversupply of shipping capacity, the nature of contractual freight rates, historical context, weaker demand, and improved global supply chains contribute to a more nuanced outlook on the overall impact of the crisis on the global economy. The real threat to inflation appears to lie in a major escalation in the Middle East, particularly if it disrupts energy supplies.



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