Risk of EU prices rising, growth slowing from Red Sea attacks

BRUSSELS - The European Union faces a risk of consumer prices surging and growth slowing due to disruptions to shipping through the Red Sea, though it has yet to feel an economic impact, a top EU official said on Tuesday.

European Commission Vice President Valdis Dombrovskis, who oversees the 27-nation bloc's economy, said shipping traffic through the Red Sea had decreased by 22% in one month in the face of attacks by Yemen's Iran-aligned Houthis.

However, the decline will accelerate as shipping companies are re-routing vessels around the Africa continent, he said, adding that the Commission was monitoring the situation very closely.

"So far there has not been visible impact on energy prices and more generally impact on goods prices. But we already see impact on transport prices, which have increased," Dombrovskis told reporters after a meeting of EU trade ministers that addressed the issue. "Certainly, it's a risk factor."

"The broader economic impact on consumer prices and the EU economy in general will depend very much on the length of this crisis," he said. "Hence, swift action is necessary."

In the latest international response to Houthi attacks, US and British forces carried out air strikes on Monday at eight different locations in Yemen, targeting a Houthi underground storage site as well as missile and surveillance capabilities.

Dombrovskis said the international community was acting, and that the European Commission would update its economic forecasts in February when it might need to factor in Red Sea disruptions.

The Suez Canal, at the north end of the Red Sea, carries 12-15% of global goods trade and 25-30% of shipping containers. For the EU, 23% of all goods imports came by ship from Asia in 2022, the vast majority of it travelling through the canal.

The EU economy is skirting a mild recession with high inflation, and prolonged disruptions of trade through the Red Sea could prevent central banks from cutting interest rates this year.

Dutch Trade Minister Geoffrey van Leeuwen said shipping costs for the Shanghai-Rotterdam route via the Suez Canal had in some cases risen 200% since the Houthis began hitting shipping in professed solidarity with Palestinians as Israel pounds Gaza.

"That obviously will feed into inflation ... Coming out of inflation, that's the last thing we need," he said.