The Red Sea is front and centre of news feeds this morning, as Houthi’s launched their largest attack yet. The rebel group launched drones, anti-ship cruise missiles and anti-ship ballistic missiles from Yemen into the Red Sea. Officials say that UK and US forces shot down 18 drones, and three missiles and avoided any damage to ships in the area.
The size of the attack and the sophistication of the weapons used marks a material escalation in an already tricky situation. Tricky because managing the risk is something that only a military can do and the price tag attached is somewhere north of a million dollars per missile or drone that is shot down – so based on last night’s attack, the response cost would be more than $20m and possibly as much as $50m.
If the current coalition is going to be doing this on a regular basis, the costs are going to mount up quickly and we don’t think the coalition can recoup their costs from shippers – and the amount of ships traversing the area is vastly reducing any how – so the coalition needs to garner wider support from other countries that are feeling the impact of this, but that cooperation is harder to come by than it was previously during the Somali pirate attacks of 2012.
So the costs of defending this are high, but the costs to the global economy of not protecting these lanes are likely to be higher, with JP Morgan now saying that if this continues then “renewed increases in global shipping costs may actually add to consumer price inflation over the next several months… (this) would reinforce our expectation for progress on reducing global core CPI inflation to stall this year” – the cascading effect that stall would have on interest rates not falling, borrowing costs remaining high and growth being subdued as a result would be material for the world economy.
Yesterday, the World Bank warned that the global economy is on track for the weakest year of growth outside of the pandemic since the GFC of 2008-9. This year the World Bank are forecasting global growth of 2.4%, as economies around the world continue to adjust to tighter monetary conditions, higher costs around debt servicing, and other economic and geopolitical headwinds. Here, for example, the World Bank indicated that the conflict in Ukraine, Gaza, and the Middle East, will continue to damage global trade and investment.
The sluggish growth forecasted for 2024, is seen to be indicative of the slow growth seen during the course of the decade so far. Far from the Roaring Twenties, the period between Q1 2020- Q4 2024 is set to be the slowest first half of any decade seen in thirty years.
The World Bank also noted how, “Governments across the world have fallen short of the ‘unprecedented’ goals they promised to meet by 2030: to end poverty and hunger everywhere; to combat inequalities within and among countries; and to ensure the lasting protection of the planet and its natural resources.”
With the Presidential election in Taiwan later this week, headlines are continuing to pay close attention to what the future may hold for the Republic of China. Given that the incumbent President, the Democratic Progressive party’s Tsai Ing-wen, has served his maximum two terms in office, the election will usher in a new leader.
The DPP candidate Lai Ching-te, is as The Economist writes “most appealing to hardline independence supporters” while also maintaining a strong foothold in the centre ground. As the current vice president, Lai Ching-te is understood to have toed a tougher line on China and yesterday accused China of unprecedented interference in Taiwan’s elections. Meanwhile, opposition party candidate Hou Yu-ih, is a supporter of engaging more closely with the PRC’s CCP in order to ease tensions. As Reuter’s states his KMT party “traditionally favours closer ties with China but strongly denies being pro-Beijing” and Hou rejects the notion of ‘one country, two systems’.
With the relationship between Taipei and Beijing continuing to come under strain, Bloomberg yesterday released an article which suggested that “the price tag” of a war over Taiwan would be “around $10 trillion, equal to about 10% of global GDP”. According to Bloomberg Economics, this would be substantially greater than the impact of the conflict of Ukraine, the Covid 19 pandemic and the GFC.
Their figures come from models which are based on two possible scenarios. Namely, an PRC invasion which draws in the US into a localised conflict, and a blockade of the Island which cuts Taiwanese trade off from global markets.
The Presidential election therefore come at a crucial time for Taiwan, with its result likely to influence the trajectory of the relationship between Taipei and Beijing, which as we have seen is of global significance.
With little in the way of primary data out today, its again worth taking a step back and considering some of the geopolitical issues of the day, which continue to impact global markets.
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Thought for Thursday, House of Commons ceasefire vote decision, minutes released from Federal Reserve monetary policy meeting, geo-political update in Russia and Gaza, and looking at today's data.
Word of the week Wednesday, data indicates public sector net borrowing in surplus, this afternoons House of Commons vote for a ceasefire in Gaza, and release of FOMC policy me.eting minutes
Travel Tuesday, changes for China's property market, attacks on Red Sea Vessels cause further shipping disruption, EU defensive naval operation launched, and US propose a UN Security Council Resolution in the Middle East.
Macro Monday, update on Israel-Gaza conflict, town in Ukraine in full control of Russian forces, and pressure for creation of more public-private partnerships in the UK from insurers.
Friday Feeling, Labour take comfort in by-election results, potential for income tax cut plans to be dropped, president of European Commission speaks on European Union defence production.
Thought for Thursday, data released this morning shows UK in technical recession, Sunak's pledge for economic growth takes a blow, increasing number of MPs not looking for re-election for the Conservative party, and Labour party lead drops seven percentage points.
Word of the week Wednesday, hotter than expected US inflation, inflation data in the UK comes in double than BoE's target, US Senate agrees foreign aid package, and today's data.
Travel Tuesday, plight of US commercial real estate owners according to Bloomberg, data shows increase in UK wage growth, easing UK unemployment, and talks to revive negotiations in the Middle East.