Rising shipping costs as a result of ongoing tensions in the Red Sea could hamper global efforts against inflation, the Organization for Economic Co-operation and Development said on Monday.
The Paris-based group estimates that the recent 100% rise in sea freight rates could increase import price inflation in its 38 member countries by about five percentage points if the increase continues.
This could add 0.4 percentage points to the total price rise after a year, the OECD said in its latest economic forecasts.
In late 2023, major shipping companies began diverting their ships away from Egypt's Suez Canal, the fastest trade route between Europe and Asia, due to a wave of attacks by Iran-backed Houthi militants based in Yemen. Tensions remain high, with the navies of countries including the United States involved in the conflict.
A cargo ship navigates the Suez Canal in Ismailia Governorate, Egypt, January 13, 2024.
Ahmed Gomaa | Xinhua News Agency | Getty Images
Ships take the longer Cape of Good Hope route around the southern coast of Africa, increasing journey times by 30% to 50%, taking their capacity out of the global market.
However, the OECD also notes that the shipping industry had excess capacity last year, as a result of demand for new container ships, which should ease cost pressures.
Claire Lombardelli, chief economist at the Organization for Economic Co-operation and Development, told CNBC on Monday that a continued increase in inflation as a result of the recent crisis represents a risk, but is not the group's base case.
“It's something we're watching closely… We've seen freight rates increase, and if that continues for a long time, that will inflate consumer prices. But right now, we're not doing that.” “We expect that to be the case,” Lombardelli said.
According to Tim Meister, chief operating officer of Dubai-based logistics company DP World, European imports represent the biggest challenge and have seen significant delays in shipments that were already on their way.
“Unfortunately, there's a higher cost in inefficiencies in the grid, so ultimately, prices go up. But they're actually nowhere near where they were at their peak during Covid… How will those costs find their way to the consumer,” Meester told CNBC. We will have to see,” he said, describing it as a “short-term problem.”
He added: “I think that what we are in now is a stable situation, because the networks have been modified, the goods are flowing, and the reservations are increasing. It just takes more time.”
The OECD's Lombardelli said that overall there had been positive data among its members in recent months showing persistently low inflation. She said this would help rebuild real income and support consumption.
The 38 OECD member countries include the United States, the United Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan and South Korea.
Its latest forecast raised its US economic growth forecast by 0.6 percentage points from its previous estimate for November, to 2.1% for this year. Its forecast for the eurozone was cut by 0.3 percentage points to 0.6%, while its forecast for the United Kingdom remained steady at 0.7%.
“We've seen positive news in the United States, and we're seeing lower inflation now, but we're not seeing a big cost in terms of the labor market there,” Lombardelli told CNBC.
“Growth looks stronger, and inflation is falling. So you will see real incomes rebuilding there in the United States, and that will support consumption growth,” he added.
She said Europe was hit hard by the energy price shock, the impact of inflation on real income and consumption, and its greater reliance on bank financing amid tighter monetary policy.
In the medium term, the OECD expects growth to be further constrained by the aging of its workforce.
The OECD, however, believes the ECB is in a position to cut interest rates in the second half of the year if current trends continue, Lombardelli said.
