Limited economic implications over Red Sea disruptions on Asia-Europe trade but downside risks abound: Moody’s Analytics

Moody’s Analytics said last week that the economic implications over Red Sea disruptions on the Asia-Europe trade are limited but downside risks abound.

It said despite the abrupt rerouting of shipping, our baseline view is that the immediate economic implications are limited. It said the transit troubles in the Red Sea can be worked around. Shipping fees are rising but are unlikely to impact end consumers immediately because shipping contracts are often negotiated long term.

“Risks abound. If the disruptions last longer than expected, or if the situation in the region deteriorates, deeper economic damage would be the result,” Moody’s Analytics said in its report titled ‘Red Sea Disruptions Scramble Asia-Europe Trade’.

Disruptions, if significant enough, Moody’s Analytics could impair production in Asia’s advanced manufacturing hubs, stretching inventories, and leaving assembly lines idle. 

A series of attacks on shipping lanes in the Red Sea has caused the most significant disruption to Asia-Europe trade since the Covid-19 pandemic. Traffic along one of the world’s busiest waterways has fallen more than two-thirds since Yemen-based Houthi rebels began targeting commercial shipping, data from early January shows. The Red Sea, which connects to the Mediterranean via the Suez Canal, is a vital conduit for Asia-Europe container shipments that represent up to 15% of global trade. Recent disruptions have prompted shipping companies to reroute vessels around the Cape of Good Hope in Africa, doubling shipping costs and lengthening delivery times by as much as 25%.

Moody’s Analytics said European firms buying manufactured goods from Asia may opt to absorb short-term cost increases because of healthy margins and weak consumer demand, limiting the fallout on inflation and growth. But if the disruptions last longer than expected, or if the situation in the region deteriorates, this may change. 

“Deeper economic damage would be the result. If the Red Sea becomes a permanently unviable trade route, it will compound troubles for carmakers in Germany and Europe more broadly given the already-stiff competition they face for market share in Asia from Chinese competitors,” it added.

In addition to impaired external demand, supply-chain hiccups are a key risk in Asia, according to Moody’s Analytics. 

“Western European exports to Asia are concentrated in higher value-added goods such as specialised machinery and chemicals. Disruptions, if significant enough, could impair production in Asia’s advanced manufacturing hubs, stretching inventories, and leaving assembly lines idle. An attendant uptick in commodity prices would worsen the damage given developed Asia’s overwhelming dependence on energy imports—Japan, South Korea, Taiwan, Singapore, and Hong Kong import more than 80% of the energy consumed domestically. For now, the Red Sea disruptions have had little impact on commodity prices despite intermittent disruptions to oil shipments,” Moody’s Analytics added.