There’s bad news ahead for the global economy if Western powers cannot stop the Iran-backed Houthi rebels from threatening commercial shipping in the Red Sea, a recent report states.
Under a pessimistic but theoretical scenario world GDP drops by 0.4% this year, according to a paper from the Washington-DC based Institute for International Finance.
It warns of the need for the west to defeat or contain Houthi rebels who are attacking shipments heading towards the Suez Canal.
- “The attacks on cargo ships in the Red Sea are particularly alarming for the global economy. Repeated attacks by the Houthis have reduced crossings in the Suez Canal and raised global transportation costs,” the report states.
That’s the current situation but it could get far worse if the efforts of the U.S. Navy along with the British Royal Navy fail to subdue or contain those Houthi rocket attacks, the report explains.
It matters because 30% of the world’s oil passes through this region. If that’s disrupted by this ultra pessimistic scenario then everyone — oil importers or not — will suffer from higher inflation mainly boosted by soaring energy costs.
“While it is difficult to predict by how much and for how long energy prices would rise, we assume that oil and natural gas prices surge by 40% in 2024,” the report states. “Furthermore, we forecast that growth in global trade volume decelerates to 0.8% (as compared to 1.6% in the baseline scenario) due to continued attacks on cargo ships, which would also feed into inflation.”
In turn that could lead Central Bankers like those at the Federal Reserve, the Bank of England and the European Central Bank, to keep interest rates higher for longer than many people expect. In other worlds, the Central banks will keep their feet on the brakes.
In practice that would mean GDP growth of 1.7% this year instead of a forecast 2%, according to the IIF. That compares to 3.4% growth in the fourth quarter, according to the TradingEconomics website.
The situation would be worse in Europe which would see a measly 0.4% growth in the European union compared to an expected 0.8% in a baseline scenario.
Higher costs of living interns of food and energy along with increased borrowing costs usually slow down growth in major economies. Many countries in Europe are already suffering from the inflationary surge that jumped into top gear when Russia invaded Ukraine sending the costs of natural gas and oil higher, especially for those people operating in Europe. The EU and the UK have along relied on cheap energy being imported from Russia.
The good news is that the pessimistic scenario has less than a 30% chance of happening, according to IIF. However, given the waning support for Israel in the U.S. there does seem to be a chance of the Biden administration pulling back on military support.
That’s particularly pertinent given that Iran, which backs multiple para military organizations across the middle east, seems determined to wage an economic war on the west.
