Trade turmoil sparks supply snarls in Europe’s biggest economies

Red Sea shipping disruptions are spawning supply-chain headwinds in Europe’s three largest economies, from rising price pressures in the UK to longer delivery times in Germany and France, data showed on Wednesday.

S&P Global’s Composite Purchasing Managers’ Index for Britain indicated “widespread reports of higher freight costs” that helped push inflation in manufacturing to the highest level since March, while supplier delivery times lengthened for the first time in 12 months.

Other PMI reports showed varying degrees of fallout from the geopolitical unrest in the Middle East. In Germany, where the private sector contracted for a seventh straight month, the rate of decline in factory input costs was the weakest in nine months. Delivery times in France reached the poorest reading in a year.

Europe’s industrial sector, already struggling to gain momentum amid soft consumer demand, is absorbing the fallout of a supply shock began in mid-December. That’s when the world’s biggest cargo ships began detouring around the southern tip of Africa to avoid rocket fire by Houthi militants aiming to disrupt trade through the Red Sea.

The longer journeys are throwing off delivery schedules and rattling inventory flows, as well as quadrupling the spot rates for shipping goods from Asia to northern Europe.

“The persistent attacks by Houthi rebels on commercial vessels navigating the Red Sea are exerting discernible impacts on supply chains,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said in a statement accompanying the latest PMI report for the euro area. 

Those figures showed private-sector activity contracted for an eighth month in January, with both Germany and France having a difficult start to the year.

For the UK, the budding supply snarls were a blot on an otherwise favorable report for January that strengthened the case for the economy to avoid a recession. 

But the disruptions, combined with still-elevation inflation in services industries, may give the Bank of England pause when considering whether to cut interest rates, said Chris Williamson, chief business Economist at S&P Global Market Intelligence.

“Inflation is therefore indicated to remain stubbornly higher in the 3-4% range in the near future,” he said.