Ongoing disruptions to Red Sea shipping routes are expected to have only a marginal impact on European economies, primarily influencing inflation and industrial production, according to analysts from BMI Research. However, if the conflict in Gaza persists, it could become a longer-term problem. 

Growth in the eurozone has already been set back by the Russia-Ukraine war, and Germany's continued economic troubles will weigh on Central and Eastern Europe, where growth is closely linked to Europe’s largest economy, analysts from BMI Research said on January 24. 

Anwita Basu, head of Europe Country Risk at BMI, forecasts a contraction of 0.3% for Germany in 2023, with a projected recovery of the same magnitude in 2024. .

Looking at Emerging Europe, she says projections vary across the broader region. “CEE’s growth is still very closely linked to that of Germany, while trade redistribution will continue to benefit the CIS region although we do expect demand from Russia to be slowing down,” said Basu. 

The war in Ukraine is expected to enter a prolonged stalemate at some point between mid-2024 and the end of 2025, allowing for reconstruction efforts to move forward.

Trade-related uncertainty 

BMI analysts see trade as an important source of uncertainty this year. “Heightened geopolitical risks, trade rerouting and slowing global demand all play a role in outlook for regional trade this year,” said Adrian Terzic, senior Europe country risk analyst at BMI.

“Europe is one of most integrated economic regions in the world … but many small, open economies are exposed to the trade frictions which are currently elevated.” 

Terzic identifies attacks on key Red Sea shipping routes as geopolitical risks affecting trade. He stated: “For now we believe risks to Europe as a result of the attacks to be primarily concentrated on the inflation and industrial production channels. The most direct impact on the European economy will be an increase in [the] price of imported goods as shipping costs have surged. This is mostly due to the higher fuel cost  of diverting trade around the Cape of Good Hope in South Africa, and also due to the longer delivery times on maritime freight.

“Europe imports a substantial volume of consumer goods and food from East Asia, which typically transit the Suez Canal; [this] will mean prices [having] to remain higher in Europe for longer,” he added. 

Terzic acknowledged a lag in passing on shipping costs to end-users, potentially mitigating the impact if Red Sea attacks cease. The duration of disruption, according to BMI, hinges on the resolution of the conflict in Gaza. The firm’s MENA analyst considers that the conflict is unlikely to persist beyond the middle of the year due to growing international pressure on Israel.

"We believe there will be a relatively muted direct impact on industrial output in Europe.  We estimate, on average, a 30-day disruption to Chinese maritime trade, the EU's largest trade partner, will put just 0.05% of GDP worth of industrial output at risk in the EU," Terzic states. Hungary, Slovakia and Ireland are identified as the most exposed countries industrially.

While small in nature, this headwind comes at an inopportune time as industry languished in 2023, with annual contractions in the region’s largest industrial manufacturers in Germany, Italy, the Czech Republic and Poland in recent months.” 

Terzic warned further, that "If these downside risks to our view for the Gaza conflict materialise, more significant disruption to European growth could result.”