The El Nino weather phenomenon is rapidly intensifying, warming surface waters in the Pacific Ocean, and is expected to cause droughts, floods, and extreme temperatures, taking a heavy toll on the global economy.
The World Meteorological Organization (WMO) expects a particularly strong El Nino this year.
The WMO’s report says El Nino conditions are expected to develop between August and October, with the sea surface temperature anomaly reaching around 2.9C, based on a multi-model average. The temperature rise could peak around November.
The US National Oceanic and Atmospheric Administration (NOAA) expects El Nino to reach very strong levels between October and December, with more than a 90% chance, and puts the likelihood of the phenomenon persisting until early spring next year at 97%.
The impact of El Nino has far-reaching implications for the global economy through agricultural production, food and commodity prices, energy supplies, logistics and inflation.
Changes in rainfall patterns can lead to drought or excessive rainfall, affecting the supply of rice, corn, soybeans, sugar, cocoa, and other agricultural products.
A moderate El Nino can drive up real commodity price inflation by around 3% within six to 12 months of its onset, according to the European Central Bank (ECB).
El Nino can also raise global non-energy commodity prices by around 5%, with the increase lasting up to 16 months.
The rise in sea surface temperatures due to a strong El Nino could push global food prices higher for about two years, with the increase peaking at 9%, particularly affecting soybean, corn, and rice prices.
The World Bank expects global food commodity prices to rise 2.5% in the baseline scenario this year, but a strong and prolonged El Nino, along with high energy and fertilizer costs, fuel demand and export restrictions, could push food prices much higher than estimated.
Sugar is the most vulnerable agricultural commodity to El Nino-driven price increases, as weaker monsoon rains in India, Thailand, and Southeast Asia could dampen sugarcane production, while excessive rainfall in Brazil could affect yields, according to Morgan Stanley.
Wetter conditions in Argentina and southern Brazil could also support yields for certain products.
Morgan Stanley expects a sharp, across-the-board rise in grain prices to be less likely, and says El Nino’s impact will depend on the region of crop growth and the timing of rainfall.
Copper is one of the commodities at high risk from a strong El Nino, as heavy rainfall and flooding in Chile could affect mining, while drought in Zambia could reduce hydroelectric generation, reducing electric supplies to mines and further tightening copper supply.
However, milder-than-normal winters in some regions could reduce natural gas and electricity demand.
El Nino’s ultimate impact on energy prices will vary depending on regional conditions.
The impact of the weather phenomenon varies significantly from country to country. While countries such as Australia, Chile, India, Indonesia, Japan, New Zealand, and South Africa experience weaker economic activity, others, including the US and European countries, see growth through various channels, according to the International Monetary Fund (IMF).
The IMF report, which covered the 1979-2013 period and included 21 countries and regions, found that short-term inflationary pressures emerge in most countries regardless of geographical location.
Dartmouth College researchers found that the 1982-1983 El Nino caused $5.7 trillion in economic losses, based on a model that considered the difference between the economic growth countries would have achieved otherwise.
The 2023 El Nino alone is expected to have caused $3 trillion in losses for the global economy by 2029.
The estimated cost of El Nino events that could occur in the 21st century could reach as high as $84 trillion.
El Nino also impacts logistics and global trade, as was the case in 2023, when water levels in the Panama Canal dropped to historic lows, forcing a reduction in daily ship transits from 36 to 24. Reduced cargo volumes and ships rerouting to longer routes can drive up freight costs and delivery times.
El Nino is considered a supply and income shock that can directly and indirectly affect the global economy, while also affecting temperatures.
Rising costs can spill over into consumer inflation, interest rate policy, corporate profitability, and public finances, while logistical issues and energy production disruptions can compound the effects.
A weather phenomenon initially emerging in a specific region can evolve into a much broader shock affecting global economic growth for years to come.
