Red Sea tensions threaten Asian economic growth

A recent report by the EIU (a research firm of the Economist Group) shows that developments in the Red Sea could slow down economic growth in Asia and fuel inflation there.

“ Asian exports were already hit last year by weaker demand from the West, so the recent attacks on cargo ships will put further pressure on export-dependent economies, especially those in Southeast Asia, ” the EIU said. The countries most affected are Indonesia, Thailand and Malaysia, the EIU said.

Houthi attacks on ships in the Red Sea are raising concerns about disruption to international trade.

According to the International Monetary Fund (IMF), in the first two months of the year alone, trade activity in the Suez Canal has decreased by 50% compared to the same period last year. Attacks by Houthi forces on cargo ships in the Red Sea have reduced the number of ships moving through the Suez Canal.

This is the shortest shipping route between Europe and Asia, carrying 15% of global seaborne trade. To avoid attacks, cargo ships are diverted around the Cape of Good Hope in Africa. This adds an average of 10 days to shipping time, affecting businesses with limited inventory.

Shipping goods from Europe to Malaysia and Singapore now takes 56 days, compared to 32 days before the Houthis began attacking cargo ships in November 2023, while shipping times to China have increased from 42 to 55 days, the EIU said.

“ Disruptions to supply chains and weaker consumer demand could shave 0.2-0.5 percentage points off Asia’s economic growth this year. In contrast, inflation in the region is forecast to rise by 0.4 percentage points. Accelerating inflation will make it harder for central banks in the Philippines, Australia and India to find room to cut interest rates ,” the EIU said.

Claire Hamonic, CEO of Ascoma International, an insurance company, estimates that war insurance premiums have increased by five to 10 times for ships and cargo passing through the Red Sea. According to some anonymous industry sources, war risk insurance rates are now between 0.6 and 1 percent of the value of the ship.

In January 2024, the Chairman of the Suez Canal Authority, Mr. Osama Rabie, said that the number of ships passing through the Suez Canal in the first 2 weeks of January 2024 decreased by 30% compared to the same period last year, from 777 ships to 544 ships.

According to Mr. Rabie, revenue in USD from the Suez Canal in the first two weeks of January 2024 decreased by 40% compared to the same period in 2023, while the volume of transportation decreased by 41%.

Source