Navigating troubled waters: The Red Sea shipping crisis and its global repercussions

The Red Sea, a critical conduit for 30% of the world's container traffic, is currently facing a shipping crisis of unprecedented scale. The New Brief, first of a new series analyzing recent economic and social developments and special issues in Fragile, Conflict, and Violence (FCV) situations in the Middle East and North Africa (MENA), explores the impact of the Red Sea shipping crisis. The recent conflict in the Middle East has led to attacks on commercial vessels, causing a significant downturn in maritime activity (Figure 1). As of end-March 2024, the volume of traffic through the strategic Suez Canal and Bab El-Mandeb Strait has dropped by half, while the alternative route via the Cape of Good Hope route has witnessed a 100% increase in navigation (Figure 2).
 

Figure 1: Reported attacks in the Red Sea region have significantly increased since the start of the Middle East conflict

^{Source: ACLED, World Bank staff estimates.
Note: The conflict events outside the Red Sea Region were predominantly in Yemen (99%) followed by Egypt, Saudi Arabia, and Jordan.}

Figure 2: Attacks targeting ships in the Red Sea have disrupted commercial shipping operations since December 2023

^{Source: IMF’s PortWatch platform, World Bank staff estimates.
Note: Figure 2A separates transit calls for each area and includes a black line to indicate the historical average for each respective area.}

This crisis has far-reaching implications, not only for the shipping industry but also for the environment and the global economy. The longer routes required by the current situation have increased travel distances for cargo and tankers by up to 53%, causing a rise in CO2 emissions due to the additional fuel burned. From an economic perspective, the crisis has led to soaring freight rates and shipping insurance costs, contributing to inflation and negatively affecting regional and international shipping economies (Figures 3-5).
 

Figure 3: The trade diversion has led to a sharp increase in monthly distance traveled by Red Sea vessels

^{Source: UN Global Platform.}

Figure 4: Travel distances and times for Red Sea vessels spiked in March 2024 compared to their pre-conflict baselines

^{Source: UN Global Platform, World Bank staff estimates.}

Figure 5: Global container shipping rates have soared, especially along routes traversing the Red Sea

^{Source: Drewry World Container Index.
Note: Drewry tracks the freight costs of 40-foot containers via eight major routes, including spot rates and short-term contract rates.}

The impact is most acutely felt by the Red Sea ports and their associated economies. Many are struggling with reduced volumes, while a few are benefiting from the diverted traffic (Figure 6). The disruptions at Yemeni ports, for example, have had tangible effects, particularly in Saudi Arabia, though the impact lessens further from the conflict's center.

Figure 6: Most Red Sea ports saw a reduction in trade activity since the start of the Middle East conflict

^{(December 1, 2023, through March 31, 2024 compared to January 1, 2022, to October 6, 2023)}

^{Source: IMF’s PortWatch platform,  World Bank staff estimates.}

In response to these challenges, policymakers are urged to remain vigilant and continuously assess the evolving impacts. It is crucial to maintain robust monetary-exchange and fiscal policy frameworks to mitigate economic vulnerabilities to new shocks. Depending on the severity of the impacts and the availability of fiscal space, governments could consider countermeasures, including countercyclical interventions.

Amidst the crisis, there are opportunities for growth. The global trend towards re-shoring, near-shoring, and friend-shoring, despite contributing to increased trade costs, presents opportunities for countries geographically close to major economic blocs like the European Union and the Gulf states. North African countries, for instance, that can offer an attractive investment climate and sound policy frameworks may be well-positioned to attract foreign direct investment from these regions. This could lead to a boost in local investment and job creation, higher incomes, and facilitate technology transfer, all of which can contribute to the resilience and growth of local economies.

The Red Sea shipping crisis is a stark reminder of the interconnectedness of global trade and the importance of maintaining secure and open maritime routes. As the situation continues to evolve, the international community must work together to navigate these troubled waters and mitigate the economic and environmental fallout.