Britain isn’t prepared for a Red Sea inflation catastrophe

Is Britain prepared for another crisis? The past few haven’t gone very well. When Covid-19 hit, it emerged that Public Health England had been prepared for the wrong kind of pandemic.

When inflation started to soar, the Bank of England couldn’t seem to compute what was happening, insisting for the better part of a year that price rises were simply “transitory” despite inflation jumping to more than double the Bank’s target (on its way, we would soon discover, into the double digits).

It seemed from the latest set of data that Britain might finally be catching a break: inflation slowed substantially to 3.9pc in the year to November, while the economy appeared to be bouncing back from an October slump.

But in the age of “permacrisis”, one can never get too comfortable. The next setback always seems to be lurking around the corner: and it’s possible that’s what’s happening now in the Red Sea.

It’s impossible to predict how much impact Houthi disruption to shipping will have on the UK economy. Yet it is hard to imagine it won’t have some effect – and not just on Britain but every major economy.

Some 15pc of global seaborne trade normally flows through the Red Sea, but according to Germany’s IfW Kiel Institute the number of shipping containers being transported daily has more than halved – down from 500,000 a day to 200,000. Its researchers estimate that global trade dropped 1.3pc between November and December last year alone: a figure that could well worsen if the disruptions continues to escalate.

And it’s not just shipping costs for Red Sea routes which are soaring – some estimates suggest an increase of 250pc, even 300pc – as companies are forced to divert their routes and send their vessels around the Cape of Good Hope instead.

The knock-on hit to energy costs is a growing worry within Whitehall.

The Red Sea is estimated to account for “12pc of seaborne oil”. US and UK airstrikes against Houthi facilities in Yemen on Thursday night saw the price of Brent crude hit $80 a barrel, up roughly 4pc. Were tensions to ease, this could be a blip – but it could also signal an unwelcome change in direction for energy prices.

Perhaps Britain will get lucky.

Speaking at the Treasury Select Committee this week, the Bank’s governor Andrew Bailey noted that the doomsday predictions at the end of last year had not come true: that, so far, there was no “prolonged spike in oil prices” despite the growing disruption along the Suez Canal.

But these words could soon look quite outdated, especially as it remains unclear if the UK has learned its lessons from previous crises.

But are we prepared for another inflationary spike? It’s certainly true that after much trial and error – at great expense to consumers – the Bank appears to be taking the risk of an inflation uptick more seriously.

It’s been a bumpy road since the Old Lady decided this was a problem it might need to tackle, but it’s likely the Bank will have ended 2023 ahead of schedule. Its latest forecasts, which have been proven wrong on countless occasions, assumed the headline inflation rate hit last November would not be reached until this April.

That the Bank has maintained a relatively hawkish line in response – insisting that interest rates can’t budge downwards from 5.25pc for some time – has become a point of contention between Threadneedle Street and those Tory MPs who worry the Bank is now hamstringing their chance to deliver economic growth.

A more sympathetic observer might wonder whether Bank’s cautious position now could indicate that, were inflation to tick up again, it would act without delay, and at least attempt to suppress rising prices before they spiral out of control.

But one thing has become clear these past few years. While no one would ever wish for the “black swan“ events we have endured, they have been a handy excuse for some policymakers and institutions to explain away Britain’s dismal economic outlook. Geopolitical shocks have been blamed for what was more likely a failure of domestic policy.

Bailey and the Bank, for example, are loath to offer up an explanation for inflation that doesn’t include external factors completely out of their control.

Vast increases in the money supply – after the Bank printed more money in the first year of the pandemic than it did in the ten years leading up to Covid – is an issue which has been repeatedly put to the governor by politicians or economists. He has never been able to provide an adequate answer.

And what if the Government wants to borrow again? Despite ministers insisting that no further airstrikes are currently planned, the combination of Red Sea disruption and Rishi Sunak’s pledge this week of an additional £2.5bn in aid for Ukraine is bound to reignite the row over defence spending.

This is an ongoing debate within the Conservative Party, which does not want to roll back funding in other key areas – like the NHS – but simultaneously would like a 3pc increase to defence spending by the end of the decade. And don’t forget about tax cuts: ideally on both incomes and inheritance.

It’s not hard to see how fiscal discipline goes out the window, as it did not just throughout the pandemic but also, unexpectedly, during the Truss administration. The former prime minister’s energy support scheme was estimated at the time to be the largest single handout in British history.

Perhaps the only real safeguard against repeating past mistakes is the person who tried to tame all this during both crises: the current occupant of Number 10, who has always approached the public finances (to the annoyance of his predecessors) with more caution.

But even his government has a bad habit of glossing over certain uncomfortable economic truths. That list includes why the UK economy seems to exist in perpetual stagnation. No doubt external and geopolitical shocks have contributed to lacklustre growth figures; but very little has been done to try to counteract hits to the economy with serious domestic reform.

If the UK economy is left to the mercy of world events, 2024 could quickly tell a similar economic narrative to previous years. It is up to our leaders, both at the Bank and in government to get the economy back on track, in spite of factors which may be out of their control.

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