The number of vessels passing through the Suez Canal and the Bab el-Mandeb Strait – a crucial shipping route connecting the Mediterranean Sea to the Indian Ocean via the Red Sea and Suez Canal – has nosedived given their proximity to the Red Sea attacks. Around 35 vessels passed through the strait on 25 January – down from 92 on 14 December (two days before the attacks began) and 71 vessels on the same day last year. The attacks have prompted shipping lines to divert to much longer routes around the southern tip of Africa.

While there’s been a broad-based uptick in costs, these diversions have resulted in a more pronounced rise in shipping costs along the routes that traditionally use the Suez Canal, such as routes connecting East Asia and China to Europe and the Mediterranean. Delivery times increased on average in January, albeit by much less than during and after the pandemic.

A different macroeconomic backdrop has set in since the pandemic

The risk that the recent rise in shipping costs will add to inflationary pressures has been referred to in several speeches by central bankers recently. Its impact on CPI inflation is difficult to quantify at this point. However, the macro environment has changed since the days of Covid-19, and shipping costs would need to rise by more than they currently have to echo those times. Indeed, there would need to be prolonged disruption to maritime trade, for there to be a similar impact on inflation to during the pandemic.

Even though shipping costs have shot up since the Red Sea attacks began, they’re still around 70% below their post-pandemic highs. What’s more, higher freight costs are not automatically being passed on to consumers – for that to occur the disruptions will need to persist for longer. Even if they do persist and pressures intensify, the probability of these costs being absorbed at the early stages of production is a lot higher now than two years ago. Back then, costs were largely driven by a more fundamental mismatch between pent-up demand for manufactured goods following post-pandemic reopening and heavily constrained supply chains.

In the current environment, in which global demand remains muted and inventories higher than after the pandemic, producers and importers have higher profit margins to offset these increased costs. It’s also worth noting that shipping contracts tend to be agreed in March for a fixed term (typically a year), so the impacts of the Red Sea disruptions and the costs of diversions would only occur with a lag.

Global trade will be volatile in the months ahead

Global trade volumes were down 1.4% month-on-month in November, almost fully wiping out the gains they made in October (+0.7%), September (+0.3%) and August (+0.5%). However, the less volatile three-month measure suggests that global trade momentum has turned slightly positive, with a 0.1% quarter-on-quarter increase expected in Q4 after the 0.6% contraction in Q3.

When it comes to exports, there was a notable decline from Japan and the US. However, euro area exports were up by 0.6% and Eastern European exports by 0.7% over the month.

Leading indicators based on real-time data suggest that there’s likely to be a further moderation in global trade over the coming months. According to the Kiel Trade Tracker, which is based on real-time shipping data, it’s expected to contract further due to the collapse in cargo volumes in the Red Sea (see below). The EU is expected to have been the worst-hit region in December – with exports down by 2.0% and imports by 3.1% over the month.