Ships avoid Suez Canal as fear of Houthi attacks lingers

Today’s top stories

• The German president and the EU’s chief diplomat joined other leaders in condemning former US president Donald Trump’s suggestion that he would allow Russia to attack any Nato member that failed to spend enough on defence.

• In her first speech as the eurozone’s top banking supervisor, Claudia Buch warned that lenders must prepare for “unexpected risks” from geopolitical turmoil, climate change and other structural shifts that could eat into their recent high profits.

• Private equity chiefs have enjoyed a $40bn gain in share value over the past year thanks to high interest rates, with earnings boosted by the growth of credit operations

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Good evening.

From the disruption of shipping lanes to fears about the conflict sparking a wider conflagration, the war in Gaza continues to have a sizeable impact on the global economy.

US and UK air strikes may have reduced the risk to vessels of attacks from Yemen’s Houthis — who claim to be targeting ships in solidarity with Palestinians under siege — but as we report today, this does not mean shipping companies are rushing back to use the strategically vital Suez Canal.

The Houthis have only launched a handful of serious attacks since January 6, with most missiles failing to hit their targets. Shippers, however, are still using the much longer and more expensive route between Europe and Asia via the Cape of Good Hope, meaning arrivals by container ships in the Gulf of Aden are down 92 per cent, car carrier arrivals have fallen 91 per cent and overall traffic through the region is down 73 per cent.

An exception seems to be Chinese container companies, which appear to be confident that China’s close links with the Houthi’s backers in Iran make them immune to attacks.

The environment is also a victim of the current hostilities: vessels diverting from the Red Sea produce up to 70 per cent more emissions as operators increase speeds to compensate for the longer route, which adds up to two weeks on a voyage from Asia to Europe. The speed increase follows a decade of “slow steaming” as shipping companies sought to economise on fuel use and minimise carbon emissions.

Freight rates have also been pushed higher by the disruption, posing an extra problem for the global shipping industry, a bellwether of global trade, following a boom fuelled by the Covid-19 pandemic. AP Møller-Maersk, the world’s second-largest container shipping company, last week warned of a “difficult patch” for the industry, as the group suspended its share buyback programme and slashed its dividend, sending its shares plunging. 

Others, however, point out that the industry is running at low capacity, with many ships due to be launched in the next couple of years, meaning it can absorb the cost of longer journeys, even if the Red Sea problems persist.

The bigger worry, as our recent Big Read explains, is that the Houthi attacks may be a harbinger for large-scale regional wars to come. 

Risks in the Middle East add to worries over potential aggression from China against Taiwan or a spillover into other countries of Russia’s war in Ukraine which could all contribute to sending globalisation into reverse.

The current hostilities also underline the risks of leaving the policing of ocean trade to a single superpower. The US has played a vital role in keeping shipping lanes open in recent decades, particularly by clearing them of pirates, although a Donald Trump presidency could call time on this practice. Meanwhile, China, the US’s main geopolitical and commercial rival, has been building up its forces and now has the world’s largest navy — albeit without the global network of hubs and bases the US enjoys.

All of which makes an interesting backdrop to the World Trade Organization ministerial meeting in Abu Dhabi in a couple of weeks, writes Alan Beattie in today’s Trade Secrets newsletter (for Premium subscribers). The mood among delegates, he says, is “sober, bordering on sombre, bordering on sepulchral”.

Need to know: UK and Europe economy

The UK statistics watchdog said there was “a way to go” before official jobs numbers could be relied on again. A closely watched survey suggests the rate of pay rises is set to fall for the first time since the pandemic, pointing to a “sustained period of high wage growth in response to a tight labour market and high inflation pushing up the cost of living”.

The opposition Labour party said it would “modernise” the UK non-dom tax regime should it win the next general election, but experts have warned that its long list of tax pledges could mean it is forced to embrace the government’s current trajectory of brutal spending cuts.

An FT Big Read details how protests by farmers have spread across Europe and whether they are pushing politics towards the populist right. Amid the demonstrations, France, the EU’s biggest agricultural producer and the world’s fifth-largest food exporter, is seeking a new generation of farmers.

Ukraine said Russia was using Elon Musk’s Starlink satellite internet system on the front line.

Need to know: global economy

The hot new topic among economists is the hunt for the elusive “neutral” level of interest rates — the borrowing rate that keeps economies growing steadily, with full employment and inflation around 2 per cent. Here’s our explainer.

A Financial Times/University of Michigan poll found US presidential contender Donald Trump had an 11-point leave over incumbent Joe Biden on handling the economy, highlighting Biden’s difficulty in convincing voters his policies are improving their financial position despite the ever-improving data. The Swamp Notes newsletter tries to explain the cognitive dissonance.

The success of candidates allied to former prime minister Imran Khan — currently in jail — in Pakistan’s election looks set to create prolonged instability as rival parties vie for control, just as the country nears a crucial deadline for a new IMF bailout.

China’s consumers are tightening their belts even as prices are falling at their fastest rate in 15 years. Businesses selling everything from cosmetics to electrical goods and cars are offering discounts. Policymakers hope the lunar new year celebrations will get consumers spending again.

Joko Widodo, who will bow out as Indonesia’s president after Wednesday’s general election, has overseen the country’s reinvention as one of the world’s most attractive investment markets thanks to green energy technology and a boom in nickel.

Governments around the world are intensifying their scrutiny over the building of data centres because of the huge strain they put on electricity grids — and national climate targets.

Need to know: business

The boss of France’s TotalEnergies told the FT that governments risked mis-selling the energy transition if they failed to point out that energy costs could rise.

Biotech companies are rushing to raise money in US equity markets again after a two-year deal drought that pushed many companies to cut jobs and shelve projects to save costs, forcing some out of business.

Investors are piling into biotech start-ups seeking to use psychedelic drugs for mental health disorders. Once considered a relic of 1960s counterculture, psychedelics have experienced a renaissance in the past two decades, including the rise of “microdosing” by Silicon Valley tech executives.

Tech companies have cut 34,000 jobs this year as they refocus on new areas such as generative artificial intelligence for their next phase of growth.

AI is making advertising campaigns easier and cheaper, but where does that leave creatives? A Big Read explains.

US bank profits plunged almost 45 per cent year on year in the final quarter of 2023, mainly because of one-off charges linked to last year’s regional banking crisis.

Tech companies continue to invest in commercial drones but the promise of delivering goods cheaply by air still has to overcome complaints about accidents, noise and interference. Using them to deliver medicines may be the way to win regulatory hearts and minds, says the Lex column (for Premium subscribers).

The world of work

A new generation of chief executives, keen to promote a clean lifestyle and encourage healthy competition among employees, are turning to group fitness challenges such as Hyrox. Some are sceptical, arguing the trend risks excluding some staff and decreasing morale.

“Quiet hiring” is on the rise: in a tight labour market, employers are increasingly looking to improve the skills of their existing workforce rather than recruit externally.

UK employers are racing to submit visa applications for skilled staff before new immigration rules kick in that will sharply increase the costs of hiring overseas.

Ann Harrison, of the Berkeley Haas School of Business, says policymakers need to put people before robots and not let automation drive down incomes.

Thinking of an MBA? Browse the FT’s guide to the best business schools in the world in our annual rankings.

Some good news

This stunning image of a starling murmuration was one of the winners in the People’s Choice section of the Wildlife Photographer of the Year competition, developed and produced by the Natural History Museum, London.