Economics Minister Robert Habeck (Greens) at the World Economic Forum in Davos. Picture Alliance
Economics Minister Robert Habeck does not expect any serious consequences for the economy due to the attacks by the Houthi militias on ships in the Red Sea.
“Everyone tells me it’s going to get straightened out again,” said Habeck on the sidelines of the World Economic Forum in Davos.
But is that true? What consequences do economists expect from the fighting in one of the most important shipping routes in world trade? A fact check.
Economics Minister Robert Habeck (Greens) does not expect any serious delivery problems or higher prices in Germany due to the attacks by Houthi fighters on ships in the Red Sea. “There are already delays in the supply chain because the ships are now traveling the long way (around Africa),” said Habeck on Tuesday on the sidelines of the World Economic Forum in Davos. But companies could adapt to this. “Everyone tells me it’s going to work out again,” said Habeck. The transport costs didn’t play such a big role either. But is that true? How do economists assess the disruption to one of the world economy’s most important trade routes?
The majority of economists currently see the consequences of the conflict in a similar way to Habeck. So far, the disruption is not comparable to the lockdowns of the corona pandemic or the “Evergiven” accident in the Suez Canal. However, there is a greater risk that the conflict will spread and disrupt shipping traffic beyond the Red Sea for a longer period of time.
We’ll let various economists have their say about why they see it that way – and also a cautionary opposing opinion. But first, what it’s actually about and what the situation is currently.
This is what the attacks in the Red Sea are about
The passage through the Red Sea and the Suez Canal is one of the most important shipping routes in world trade – especially for transport between Asia and Europe. Ten to 15 percent of all container cargo worldwide passes through the Suez Canal.
To the south of the Red Sea there is a strait off the coast of Yemen. Houthi militias are fighting against the government in the country. The Houthis are supported by Iran, Yemen’s government by Saudi Arabia. The Houthis have large areas of land on the Red Sea coast under their control.
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Like Iran, the Houthis seek the destruction of Israel. Since the Hamas terror attack and Israel’s counterattacks in the Gaza Strip, the Houthis have been attacking cargo ships in the Red Sea. The target is ships that visit ports in Israel or whose owners have ties to Israel. The USA and Great Britain have been responding to this for days with attacks on Houthi positions in Yemen.
Since the attacks began, several shipping companies such as the German Hapag-Lloyd have stopped sailing through the Red Sea. They take the detour around South Africa. This route takes between seven and twenty days longer. The freight costs are correspondingly higher. Because there was initially a gap in deliveries, factories like Tesla near Berlin had to interrupt production.
“Not comparable to Corona” to “big concern”: The economists’ view
“The situation today is not comparable to the environment during the “Evergiven” disaster in the Suez Canal and the corona pandemic, when lockdowns led to a drastic decline in the supply of goods,” says Julian Hinz from the Kiel Institute for the World Economy (IfW). Apart from a slightly longer delivery time for products from the Far East and increased freight costs, no negative consequences for global trade are to be expected.”
Shipping a standard 40-foot container between China and Northern Europe already costs over $4,000. In November it was around $1,500. However, the current price is still far below the drastic swings caused by the corona pandemic, when a container on this route cost up to 14,000 US dollars.
The President of the Federal Association of German Business (BDI), Siegfried Russwurm, gives greater importance to the risk of an escalation of the Middle East conflict than to the detours in shipping. One can prepare for the detour around Africa, said Russwurm in Berlin.
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Like Habeck, RWI Essen does not expect higher prices in Germany. RWI economic expert Torsten Schmidt said he does not expect any noticeable impact on consumer prices. However, the additional uncertainty makes it more difficult for the German economy to overcome its weakness. “The production stop at Tesla clearly shows how fragile the supply chains still are,” said Schmidt.
Two big differences from Corona and Evergiven
1. When the “Evergiven” banked in the Sue Canal and blocked traffic, it caused a large traffic jam. Container ships and tankers were already on their way with their cargo and were stuck. These goods, which had already been ordered, were missing from companies. A replacement could not be obtained quickly.
2. This is different now. There is no shortage of goods, the delays are calculable – and one-off. That is the crucial difference to Corona. The lockdowns affected both factories and ports, particularly in China. As a result, many goods, materials, components or preliminary products were not available at all for a long time.
Now the factories can deliver and the ships can sail, they just take longer. There is therefore only a one-off gap in the supply chains. The supply chains can then be closed again.
This becomes clear using the example of Tesla. The break in production lasts until the first ships with the products arrive again after a long journey. Then the delivery starts again without a break.
3. The supply chains are not the problem, but the effort and therefore the costs are. The higher freight rates have already been addressed. Logistics companies such as Kuehne & Nagel and DHL also reported that companies are switching to aircraft for important freight. Air freight is many times more expensive than ship rates. Kühne & Nagel manager Yngve Ruud also pointed out in “Welt” that the fully optimized logistics are threatened with a “shortage of containers” if journey times are longer.
Despite the noticeable increase in transport costs, “no noticeable consequences for consumer prices in Europe are to be expected, especially since the share of freight costs in the value of high-priced items, for example in the consumer electronics sector, is only in the per thousand range,” says IfW expert.
Michael Heise, chief economist at asset manager HQ Trust, is more critical, especially in the medium term. “The impact on Germany is huge,” warns Heise. “The passage through the Red Sea and the Suez Canal is extremely important for numerous flows of goods and energy raw materials.” A worsening of the situation would have a broad impact across many industries: “Preliminary and final products will become more expensive due to higher freight costs and delivery bottlenecks.”
Heise also expects the price of oil to rise if the conflict continues. “Ultimately, transporting oil is becoming more difficult and expensive and there are obvious risks to world market prices.” The price of oil is still at a level that is acceptable for the global economy.
Heise also points out that after the Corona experience, many companies announced and implemented a higher level of situation management and also diversified their purchasing channels. Nevertheless, the economist says: “If the situation continues, it will have worrying effects on Germany, which is in a difficult situation.” The current Houthi crisis threatens the urgently needed recovery in private consumption in Germany and a revival in world trade.
Heise therefore also contradicts Robert Habeck: “The current situation offers great cause for concern. We can only hope that the conflict will end soon.”
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