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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Many times I have heard policymakers pause, lower their voices, furrow their brows and say: “Now is not the time to be complacent.” These are always well-intentioned words of caution. But for them to have any meaning, officials should also identify moments when risks are lower than usual and a little complacency would lighten the mood. Now might be that time.
Houthi rebels have threatened ships they link to supporters of Israel, prompting a sharp drop in container shipping using the Red Sea since early December. Shipping lines prefer the longer route around Africa to the risks of sailing close to Yemen’s coastline — with the latest attack coming last week on a commodities vessel registered to a UK company. This adds significant costs in time and fuel. According to Drewry, the supply chain advisers, the price of shipping a standard size container from Shanghai to Rotterdam has more than trebled from $1,442 in mid-December to $4,984 in late January. This will have an effect on inflation.
But it is important to put things into context. This is nothing like the supply chain nightmares of 2021 and 2022 that fuelled the worst inflationary episode in the past 40 years. Some Chinese shipping lines are still happily using the Red Sea route.
In 2021 the equivalent container shipping price exceeded $14,000 and that had little to do with the six days the Ever Given was stuck in the Suez Canal after running aground. Rampant goods demand as economies opened up after a wave of Covid-19 and consumers avoiding face-to-face services was the main culprit. It was not just the shipping price — approximately 1.5 per cent of the final price of consumption goods according to Goldman Sachs — but the products themselves that jumped in price.
Joseph Briggs and Giovanni Pierdomenico at Goldman Sachs estimate the rise in transportation costs caused by the Houthi attacks will raise global inflation at the end of 2024 by 0.1 percentage points, with a slightly higher increase of just over 0.2 percentage points in Europe. This is, frankly, little more than a rounding error in inflation measurement. Recent UK, European and US measures of price increases have undershot forecasts by more than that.
The other key driver of European inflation was the 2022 supply shock in natural gas as Russia exploited its position after the full-scale invasion of Ukraine. With supply dwindling through the European summer, wholesale gas prices rose from around €28 a megawatt hour in June 2021 to a peak of more than €330 per MWh in August 2022. The spot price is now down below €30 again, with shipments of future natural gas for Europe on offer next winter at €34.6 a MWh. These rates are far below the levels used in the European Central Bank’s inflation projections as recently as December last year.
Two reasons explain the quiescent future European gas price. First, a continued fall in gas demand across the continent and second a massive increase in supply, particularly from the US. The EU imported 45mn metric tonnes of natural gas from the US in 2023, up from 15.8mn in 2021, according to S&P Global, with the trade so profitable that a glut rather than shortage is more likely this decade. President Joe Biden’s decision to pause approval of new US LNG export terminals last week is unlikely to change the picture.
Houthi action has therefore caused a small rise in shipping costs compared with the past three years. That comes at a time of subdued global goods demand. There is a coming glut in options for shipping goods, oil and gas. There is, of course, the possibility of a major war in the Middle East shutting passage through the Gulf of Oman, but this has been a risk for the past 50 years. So I can warn about genuine dangers in future: now is a time to be complacent about the economic risks from the Houthis.