A recent report from the Institute for International Finance warns of potential economic consequences if Western powers fail to stop Iran-backed Houthi rebels from threatening commercial shipping in the Red Sea. Under a theoretical scenario, global GDP could drop by 0.4% this year due to the attacks on cargo ships heading towards the Suez Canal. The report emphasizes the need for the west to defeat or contain the Houthi rebels to prevent further disruption to global trade.
The current situation is concerning, as repeated attacks by the Houthis have already reduced crossings in the Suez Canal and raised global transportation costs. If efforts by the U.S. Navy and British Royal Navy are unsuccessful in subduing the Houthi rocket attacks, the consequences could be far worse. With 30% of the world’s oil passing through the region, any disruption could lead to higher inflation and energy costs, impacting oil importers and non-importers alike.
The report predicts that in an ultra pessimistic scenario, oil and natural gas prices could surge by 40% in 2024, leading to a deceleration in global trade volume and increased inflation. This could result in central banks such as the Federal Reserve, Bank of England, and European Central Bank keeping interest rates higher for longer than expected. As a result, GDP growth could slow down to 1.7% this year, compared to a forecasted 2%, with Europe experiencing even lower growth of 0.4% in the European Union.
The potential impact of higher costs of living, food, and energy, along with increased borrowing costs, could further slow down growth in major economies. The situation is exacerbated by the recent surge in inflation caused by the Russia-Ukraine conflict, which has increased the costs of natural gas and oil, especially for European countries reliant on imports from Russia. Given the possibility of the pessimistic scenario unfolding, there is concern about the Biden administration pulling back on military support for Israel, leaving the region vulnerable to economic warfare from Iran.
Despite the potential risks outlined in the report, the Institute for International Finance estimates that the pessimistic scenario has less than a 30% chance of occurring. However, with the uncertainty surrounding the current geopolitical situation and the waning support for Israel in the U.S., there is a real possibility that the economic warfare being waged by Iran-backed groups in the Middle East could escalate. As countries worldwide navigate the challenges posed by these threats, it is essential for Western powers to address the situation in the Red Sea to protect global trade and prevent a further economic downturn.
