A protracted conflict in the Red Sea and rising tensions across the Middle East raise the risk of catastrophic consequences for the global economy, reigniting inflation and disrupting energy supplies.
Ahead of Rishi Sunak's report to the House of Commons tomorrow on UK and US airstrikes on Houthi bases in Yemen, World Bank economists warn that the crisis will now lead to higher interest rates, lower growth, stagnant inflation and more geopolitical uncertainty. O writes Guardian.
After a second night of airstrikes against Iran-backed rebels in Yemen, Joe Biden said the United States had sent a personal message to Tehran that “we are well prepared.” Speaking to reporters on the White House lawn on his way to Camp David earlier today, the US president declined to comment.
End of illusions
But there is now growing concern in government circles in London and Washington that, as Sunak and Biden fight for re-election, events in the Middle East could overturn improved prospects for economic recovery, leaving them at the ballot box.
Although airstrikes against Houthi targets in Yemen have won broad cross-party support in Westminster, Sunak will face questions from MPs concerned about the protracted conflict and the long-term plan for Middle East peace. Some left-wing Labor MPs are expected to press Keir Starmer on why he supported military strikes.
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Biden has also faced backlash from progressives in his own party who are already deeply opposed to US military support for Israeli action in Gaza. California Rep. Roe Hanna said: “The president needs to get to Congress before he strikes against the Houthis in Yemen and drags us into another conflict in the Middle East.”
Escalation of conflicts
In its latest report on the global economic outlook, the World Bank says the crisis in the Middle East, along with the war in Ukraine, has created real risks. “An escalation of the conflict could lead to an increase in energy prices, with broader implications for global activity and inflation,” it said.
“Other risks include fiscal pressures related to real interest rates, persistent inflation, weaker-than-expected growth in China, and trade fragmentation and climate change-related disasters.”
“Recent attacks on merchant ships crossing the Red Sea have already begun to disrupt key shipping lanes, eroding slack in supply networks and increasing the potential for inflationary problems. In an environment of escalating conflict, energy supplies will also be significantly disrupted, leading to higher energy prices. This will have a significant impact on other commodity prices and geopolitics. and increase economic uncertainty, which could limit investment and lead to further weakening of growth,” he added.
“This has escalated into a serious problem,” said John Leavillin, former chief economist of the Organization for Economic Co-operation and Development (OECD). He raised the chance of serious disruption to global trade from 10% to 30% a week ago, saying “there is a dire and inevitable development that could see the situation in the Red Sea in the Strait of Hormuz. The wider Middle East”.
Ben Saranko, an economist at the Institute for Financial Studies, told the Observer that for his part, the crisis highlights the dangers of Chancellor of the Exchequer Jeremy Hunt using limited fiscal space to promise tax cuts. “If we've learned anything in recent years, it's that worse shocks can come,” Jarango said. “Spending every penny of the budget on tax cuts, he has no room for maneuver if a bad shock comes and the outlook worsens,” he added.
The conflict in the Middle East widened on Thursday when dozens of British and US airstrikes hit Houthi positions in Yemen. The bombings came in response to attacks on ships crossing the Red Sea, which has crippled shipping on one of the world's most important sea lanes.
A strong answer
The Houthis say they only target ships linked to Israel in an effort to support Palestinians in Gaza, but most of their targets are unrelated to the small Middle Eastern state, against which they have also fired missiles.
Friday night's US attack on a radar base in Yemen prompted Houthi threats of a “strong and effective response” to international attacks and fueled fears of regional escalation in a conflict that is already raging across multiple borders. Houthi spokesman Mohammed Abdulsalam said the strikes had no significant impact on the Houthis' ability to block shipping from the Red Sea and Arabian Sea.
The top United Nations official in Yemen, Special Envoy Hans Grudberg, warned of “serious concerns” about stability and fragile peace efforts in Yemen, which has endured years of civil war.
Decrease in world trade
The Houthis are one of several groups close to Iran in the region, including Syria, Iraq and Lebanon, that attack targets inside or related to Israel. Hezbollah in Lebanon is perhaps the most serious threat.
Faria al-Muslimi from Chatham House's Middle East Program commented, “The Houthis are more intelligent, prepared and well-equipped than many Western commentators realize. Their recklessness and willingness to choose escalation when faced with a challenge is often underestimated.”
William Payne, an expert at the British Chamber of Commerce, estimated that “about 500,000 containers passed through the Suez Canal in November, a 60% drop to 200,000 in December.” Ships, of course, follow different routes, but this has increased costs, resulting in a container that cost $1,500 in November reaching $4,000 in December. “If things get worse, congestion will increase, container costs will increase and global trade will decrease further,” he said.
A recession is coming
Economists around the world, many of whom are in Davos this week for the annual World Economic Forum, are increasingly worried that many of the world's largest economies could fall into recession this year. In particular, they fear that central banks will make only modest reductions in borrowing costs, exacerbating the cost-of-living crisis facing millions of households.
The prospect of higher oil prices could convince central banks to hold firm and keep interest rates higher than currently expected. Liam Byrne, chairman of the House of Commons business and trade committee, said: “There is a real risk that the war in the Red Sea will push prices up just as inflation is starting to fall.
The World Bank has already warned that global supply chains are at risk again … not least with this new Suez war coming, as drought cuts off trade through the Panama Canal. Two of the five keys to global trade are now at real risk.”