IN FOCUS6-8 min read

Will Suez shipping disruption derail hopes for rate cuts?

Containers aboadr tanker vessel


David Rees
Senior Emerging Markets Economist

Growing geopolitical tensions in the Middle East have begun to disrupt global supply chains. Following attacks by Houthi rebels on vessels passing through the Red Sea en route to the Suez Canal and key global economies beyond, major shipping companies have warned of significant delays to deliveries.

Satellite images show that virtually no ships destined for major European ports or the US and UK and currently passing through the Red Sea, instead diverting around southern Africa.

The latest disruption follows problems at the Panama canal, where a combination of drought associated with climate change and shifts in rainfall due to El Nino, have caused water levels to fall. Meanwhile in Europe, wet weather means that the level of the Rhine, a key shipping route for German manufacturers, is too high. It seems that global supply chains face a perfect storm of risks.

All of this evokes painful memories of the supply chain problems that erupted during the Covid-19 pandemic. These contributed to the recent bout of high inflation that ultimately forced global central banks to aggressively raise interest rates. Markets are now pricing in aggressive interest rate cuts in Europe, the UK and US, with some cuts anticipated as early as the first half of 2024.

All of this begs the question of whether renewed supply chain problems are about to drive up inflation, forcing policymakers to reassess their outlooks.

Much will depend on how long the current disruptions last, but at least three important differences in the global economic backdrop suggest that problems in the Red Sea are unlikely to lead to major increase in inflation.

First, demand conditions are now much softer. Whereas large monetary and fiscal stimulus fired up the global economy following the initial disruption caused by the global pandemic, growth is now slowing. We project global GDP growth of just 2.5% in both 2024 and 2025. The eurozone is probably already in recession, the UK is weak and activity in the US is cooling.

Second, whereas lockdowns to contain the spread of Covid-19 meant that demand was concentrated into the goods sector during the pandemic, consumption patterns are now much more balanced. Indeed, the reopening of economies caused demand to skew back towards services over the past couple of years, leaving the global manufacturing sector in recession.

Third, the supply side of the global economy is also in much better shape. Whereas rolling lockdowns completely closed production during the pandemic, there are no such disruptions now. Detours around southern Africa will lengthen delivery times, but goods will still arrive at their destinations – suggesting that outright shortages are unlikely. If anything, recent trade data from China showing exports growing far more quickly in volume than in value-terms, suggest that firms in at least some sectors are having to discount prices to clear excess capacity.

Demand for goods is soft, while there is plenty of supply

Global supply chains

Risks to commodity supplies

A more immediate risk to global inflation would be if tensions in the Middle East begin to affect the supply of commodities, in particular driving up energy prices. This is something that we began tracking in our latest forecast round with our Geopolitical Crises that assumes, in addition to trade frictions, a broadening of tension in the region causes oil prices to climb towards US$120 per barrel. Our simulation moved the global economy in a stagflationary direction as higher energy costs drive up inflation, with the risk of secondary effects (given tight labour markets) weighing on growth and forcing central banks to abandon rate cuts and perhaps even hike further.

So far, though, oil prices have been well-behaved with Brent crude largely unchanged at just under US$80 per barrel.

At the very least, though, the latest hiccup in shipping routes serves as yet another reminder of the risks that stem from relying on lengthy supply chains in a more fractious world. As a result, the rewiring of global supply chains that forms a key pillar of the 3D reset looks set to continue.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


David Rees
Senior Emerging Markets Economist


Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.