The West is sleepwalking into an economic catastrophe in the Red Sea
- Oops!Something went wrong.Please try again later.
A second Suez Crisis is upon us. In the first, Gamal Abdel Nasser, the powerful nationalist president of Egypt, seized the canal from the British, triggering an ill-fated intervention.
This new crisis is very different and centres on the Houthis, a rebel faction in Yemen that until recently Westerners assumed were no more of an international threat than the dogged, but poorly equipped Taliban.
Driven by tectonic shifts in regional geopolitics and the proliferation of new missile and drone technology, the Houthis could well manage to enact a de facto blockade of the Suez Canal by preventing commercial maritime vessels entry to the Red Sea. The economic effects of this could be nothing short of profound.
In just the past week, global shipping companies have diverted around $35bn worth of cargo. Rabobank is forecasting a 20-25pc reduction in the capacity of the shipping companies affected by the blockade.
This shock to trade could be much like the one we experienced in lockdown when global supply chains seized up, although in truth the current crisis could be worse.
During the lockdown supply chain disruptions, policymakers buried their heads in the sand. Economists should know that a large disruption to the supply side of the economy will result in inflation. But policymakers, giddy from the powers the lockdowns granted other sectors of government, ramped up fiscal expenditure and loosened monetary policy. We have been living with the effects ever since in the form of spiralling inflation, a cost of living crisis and high interest rates.
Surely though, this time policymakers will get it right. Fool me once, shame on me; fool me twice, shame on you, after all. But heads appear to remain buried, and sand abundant. Markets remain sanguine. Since the blockade was enacted, the oil price has barely moved, and the FTSE has rallied.
What is going on? In a word: confusion. Foreign policy experts in Washington – and London – are becoming ever more aware that the world is changing rapidly, but they are not sure what to do about it. It is no secret that the Biden administration is flummoxed by the current crisis in the Middle East.
Former alliances, like the important Saudi-American relationship, are breaking down. Now, critics who have raised the issue of naval vulnerability to new drone and missile technologies are having their theories tested in real time.
The Western world is in a daze. If we do not come to terms with the new realities, however, it will only result in further mismanagement. Until now prophets of radical geopolitical change have been dismissed as pessimists and Cassandras. But when things get bad pessimists get the upper hand, and it barely needs be said that Cassandra was ultimately proved right.
Economists have little to offer in the way of solutions to the current crisis in the Middle East. It is enormously complex and difficult. But perhaps we can provide a dose of reality. Unless Israel calls off its military operation in Gaza, the crisis will continue to unfold. This seems unlikely.
Earlier this week, the Pentagon announced the commencement of Operation Prosperity Guardian. The plan seems to be that a combined naval force will unbung the bunged up Red Sea. But ultimately this will mean a conflict with the Houthis. Even in an optimistic scenario, such a conflict would take a long time.
The new developments in weapons technology suggest that this will be a costly proposition. Politico has highlighted that the Pentagon is worried about cost differentials as $2m missiles are being fired to take down $2,000 drones. “That quickly becomes a problem because the most benefit is in their favour,” one expert told the publication.
Production times on the $2,000 drones is also far shorter than on $2m missiles, so the Houthis will have a logistics advantage.
If the Red Sea remains a no-go zone for some time, it looks like the Western world is going to have to brace for another wave of inflation. Frankly, it is not clear that our economies, beaten and bruised from the last wave, can take it. Another round of cost of living crisis? Even higher mortgage rates? The prospect of a painful inflationary recession is now very real.
The Bank of England needs to wake up. Unless something drastic changes, the talk of lower interest rates in 2024 coming from the Federal Reserve – in an election year, it should be noted – makes little sense. The Bank should be braced for another round of geo-economic turmoil.
What about the Tories? Polls indicate voters are turning against them for a number of reasons, but none more important than the state of our economy. A second round in the ring with a rising cost of living could finish them off. If current polling is indicative, and if it gets worse, there is a real possibility that the party, founded in 1834, may not survive. CCHQ would be well advised to call an election immediately.
Our second Suez Crisis is here. The world could look different after it than it does now. There are many unknowns, and we have far less control than we would like. We should batten down the hatches: another inflationary storm is coming over the horizon.
