Have the Houthi Red Sea attacks hurt Israel’s economy?

Most of Israel’s trade is through the Mediterranean, unaffected so far. Still, longer-term risks for Israel’s economy are growing, say analysts.

Tensions in the Red Sea have extended to Yemeni land after the United States and the United Kingdom led bombings against multiple sites controlled by the Houthi armed group on Thursday night.

The Houthis have carried out dozens of attacks on commercial vessels that they say are linked to Israel, and that were passing through the 30km (20-mile) wide Bab-el-Mandeb strait. They demand that Israel stop the bombardment of Gaza and allow humanitarian aid.

A US-led coalition is trying to deter the Houthis by positioning destroyers and other military platforms in the Red Sea and by shooting down the Yemeni group’s missiles and drones. But the Houthis have been clear that they have no intentions of stopping until Israel ends its war, which has killed nearly 24,000 Palestinians.

Traffic through the Red Sea is down by more than 40 percent disrupting global supply chains. Some of the world’s largest shipping operators have redirected their vessels around the Cape of Good Hope on the southern tip of Africa, delaying delivery times and adding a further 3,000-3,500 nautical miles (6,000km) to their route.

But just how much have the Houthi attacks impacted Israel’s economy itself? And how are they affecting global trade?

So far, at least 26 vessels have been attacked by Houthis since they seized the Israeli-linked Galaxy Leader vessel in November.

US warships in the region have thwarted several other attacks by the Houthis, with the latest being on Wednesday when the US and UK shot down missiles and drones. The UN Security Council on Wednesday condemned the Houthi attacks.

The Red Sea connects Asia to Europe and the Mediterranean, via the Suez Canal. Currently, around 12 percent of the world’s shipping passes through the Red Sea, averaging around 50 ships a day, carrying between $3bn to $9bn worth of cargo. In total, the value of goods passing through the route is estimated at more than one trillion dollars per year.

In early January, the Houthi rebels announced that, should a vessel wishing to transit the area declare its ownership and destination in advance of entering the waters, it would not be fired upon.

Maersk and Hapag-Lloyd have since denied reaching any agreement with the rebel group.

As of mid-December, Israel’s only Red Sea Port, at Eilat, reported an 85 percent drop in activity since the attacks began.

While the bulk of Israel’s marine traffic comes through the Mediterranean ports of Haifa and Ashdod, exports of Dead Sea potash, as well as imports of Chinese manufactured cars – which make up 70 percent of Israel’s EV sales – are reliant upon Eilat.

For many carriers, the risks to both vessel and crew are significant. This week, Chinese state-owned carrier Cosco joined with its subsidiary, OOCL in suspending shipments to Israel.

What’s happening in one of the world’s busiest maritime routes?

However, Brad Martin, a former US Navy captain and a director of the Institute for Supply Chain Security at the RAND Corporation cautioned against overstating the challenge before Israel.

“Red Sea shipping disruption, and even some shippers declining Israeli cargo, will not bring Israel to its knees economically,” he wrote by email.

One acute vulnerability may be Israel’s ambitions to establish itself as an exporter of Liquid Natural Gas (LNG) of which it holds a small but growing share of vital international market.

“Prior to the attack (of October 7), Israel was on its way to becoming a reliable gas exporter,” Gabrielle Reid, an associate director at risk consultancy S-RM, said.

“But, the hostilities have exacerbated the political risk of doing business in Israel and further jeopardise the outlook for the Eastern Mediterranean region as a potentially important player in global natural gas markets,” she said.

According to Clarkson Research Services Ltd, traffic through the Red Sea is currently down 44 percent on that recorded during the first half of December, as increasing numbers of vessels take the longer route around the Cape of Good Hope to reach harbour.

As well as the obvious costs of increased fuel and manpower, this carries increased insurance costs and can lead to delays, as congestion at ports takes its toll.

According to Drewry World Container Index, which tracks shipping along eight major routes between US, Europe and Asia, the cost of transporting a 40-foot (12-metre) container from China to Europe is expected to increase by 248 percent from $1,148 in November, when the attacks began.

Depending upon how shipping companies respond, Simon Heaney, a senior manager in container research at Drewry, told media that overall costs could increase anywhere between 3 and 21 percent.

Delays will also be a significant factor, as much of the “Just In Time” manufacturing processes in developed economies, where goods are delivered moments before they are needed, struggle to adapt to interruptions.

While current demand for manufactured goods from countries such as China and India remains lower than during the peak of the pandemic, any change in cost or disturbance to shipping schedules is likely to carry consequences.

However, while increases in transport costs can lead to inflation – the International Monetary Fund estimated that chaos in shipping routes during the pandemic led to a 1 percent increase in global inflation –  that has not happened yet, economists have suggested.