Red Sea attacks: trade down but no impact on inflation yet

Shipping costs have spiked since the start of the year

Source: NatWest, Drewry, Shanghai Shipping Exchange, Freightos Baltic, Harper, Bloomberg; weekly data; Latest data as of end-January 2024

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.

Shipping delivery times have slipped – but only modestly by comparison with the Covid-19 pandemic

Sources: NatWest, S&P Global

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.

Global trade looks set to cool in the months ahead

Sources: NatWest, CPB Netherlands, Kiel Institute for the World Economy

Want the full report?

Login to Market Insights to get the full report and for more analysis on global trade trends and the economy.
Don’t have access? Get in touch with your NatWest representative or contact us here.


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top