ab17 January 2024Global Research and Evidence LabPowered byUBS Evidence LabYESGlobal Economic PerspectivesThe inflation impact of the spike in global shipping costs is likely (very) smallThe disruption to global sea freight is significantGlobal shipping costs since mid-November have increased 115%, and as much as 250% on some of the China-to-Europe routes. Attacks by Houthi militants in Yemen on ships passing through the Red Sea have significantly disrupted shipping routes, and led at least part of the trade through the Suez Canal and the Bab el-Mandeb Strait to be diverted round the Southern tip of Africa (adding about 9 days for an average journey between Taiwan and the Netherlands, for instance). We show in Figure 1-6 how the daily volume of trade passing through the Suez Canal and Bab el-Mandeb strait has fallen by about 2.2-2.4 million metric tons (40-45%) since mid-November, while that around the Cape of Good Hope has increased by 1.7 mln metric tons (+34%).And our global supply chain tracker has deteriorated by nearly 1½ stdev One question we've been getting from clients is whether this has led to a renewed surge in our global supply chain tracker, and whether this poses a risk to the global disinflation that had been taking hold in recent months. Figure 10 shows how our supply chain stress tracker has shifted from -0.95 stdev below normal to +0.44 stdev above normal (this is for the median; the simple average has shifted from -0.93 stdev to +0.62 stdev). That seems like a large shift, though clearly nothing like what we had at the height of pandemic bottleneck stress. But this is very different from the Pandemic supply chain stressThe reason our bottleneck tracker jumps so much is largely because of its makeup: in our 20 indicator tracker we have 4 shipping cost variables which had a 4 stdev move higher, versus only 0.3 stdev deterioration for everything else. Most of our delivery time indicators aren't picking up anything yet, despite 12% of global trade passing through the Red Sea. We would argue that the Red Sea disruption is a lot less impactful than what happened to supply chains in the Pandemic because (i) there are no supply shortages (e.g. chips shortages to produce goods); (ii) there is no excess demand for goods (pandemic spending patterns have dissipated) and (iii) there are no container shortages (global trade is in recession). Moreover, although delivery of goods takes longer and is more expensive, the delay is measured in days and not months or quarters.The impact from shipping costs alone to inflation is likely very smallAlthough freight costs skyrocketed during the pandemic, these had relatively little to do with the inflation surge. As we show in Figure 9, the cost of freight and insurance, as a % of total US import costs for instance, increased from roughly 2.7% to just 4.1%, des...
