Some indications of the impact of the Red Sea conflict on the wider economy are beginning to emerge. Several of the just-published PMIs (Purchasing Managers Indexes) from S&P Global suggest that both the disruption to supply and the increased freight rates are affecting aspects of economic activity.

For example, S&P asserts that within the Euro area, manufacturing costs have fallen over the past month, however it comments that “inventories were also impacted by delays in the supply of inputs. Supplier delivery times lengthened on average for the first time in a year in January, widely linked to shipping delays caused by disruptions in the Red Sea”. This is despite demand conditions in the euro area continuing to be weak with the S&P ‘Flash’ Eurozone Composite PMI Output Index at 47.9, representing a continued fall in output.

The situation in the UK is somewhat better, with the S&P ‘Global UK Composite Output Index’ rising to 52.1 although manufacturing production is weak due to poor export demand and customers looking to reduce inventory. However, S&P said that its UK respondents in manufacturing companies “also reported growing issues with supply chains, amid intensifying disruptions to shipping in the Red Sea. Average supplier delivery times lengthened in January to the greatest extent seen since the pandemic-related supply issues of September 2022. Some 80% of firms reporting slower deliveries explicitly linked the delays to events in the Red Sea…. the extended journey typically lengthens the delivery route by at least 10 days. Delays were most widely reported for textiles and vehicle manufacturing”.

However, for both the Euro zone and the UK, S&P said that the problem “remained far less severe than recorded throughout much of the 2020-2022 pandemic period”.

It is unclear if these sorts of problems will ‘wash-out’ as shippers adjust the lead-times of their supply chains. It is also unclear how the shipping lines will respond, as they have options to increase the speed of their vessels, increase the number of vessels they operate or rationalise their route structure. There are also a number of other responses to the problem emerging apart from the greater use of airfreight, such as overland transport across the Arabian Peninsula.

The problems in the Red Sea may ease in the near future but it appears that they have already had an impact on some economies.

Author: Thomas Cullen

Source: Ti Insights

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