Abnormal Pacific water temperature affects global economy

The seemingly unrelated events of reduced coffee production in Brazil, power grid alarms in the UK, and reduced draft depth for ships passing through the Panama Canal may have the same underlying cause, which is the El Ni ñ o phenomenon caused by abnormal water temperatures in some parts of the Pacific Ocean.

 

In recent years, with the frequent occurrence of extreme weather worldwide, economists, international institutions, and financial markets have begun to pay increasing attention to this meteorological term. So, what is the connection between El Ni ñ o phenomenon and the global economy? How does it affect the trend of prices? Why should we be more vigilant about the potential economic impact it may bring?

 

The 'climate variable' of the global economy

 

El Ni ñ o refers to a climate phenomenon in which the sea surface temperature in the central and eastern equatorial regions of the Pacific Ocean remains abnormally high, thereby affecting global atmospheric circulation.

 

The Pacific Ocean accounts for about half of the total area of the Earth's oceans and is often referred to as the "natural central air conditioning" of global weather. When the sea surface temperature in this area abnormally rises, the atmospheric circulation and precipitation belts will change accordingly, and the weather in different regions will be reshuffled as a result.

 

According to historical experience, El Ni ñ o usually leads to significantly increased rainfall in some areas of the west coast of South America, high temperatures and droughts in Australia, Indonesia, weakened summer monsoons in India, heavy rainfall in some parts of East Africa, and possible droughts in southern Africa. The impact of El Ni ñ o is not exactly the same every time, but it usually increases the probability of extreme weather events occurring.

 

The Financial Times believes that in the era of globalization, El Ni ñ o is no longer just a meteorological concept, but has become an important risk factor that can affect global market expectations. The International Monetary Fund (IMF) also pointed out in its research that the impact of El Ni ñ o is not limited to countries experiencing abnormal weather, but can also be transmitted outward through international trade, cross-border investment, and commodity markets, and its impact may affect economies that have not directly experienced extreme weather.

 

Currently, more and more international institutions, multinational corporations, and financial markets are incorporating El Ni ñ o into their macroeconomic analysis frameworks, viewing it as an important "climate variable" that affects the world economy.

 

Boosting food and energy prices

 

Many important agricultural production areas around the world are located in regions that are heavily affected by El Ni ñ o. For example, Brazil is an important global exporter of coffee and sugar, India and Thailand are important rice producers, Indonesia and Malaysia supply most of the world's palm oil, and cocoa is mainly produced in West Africa. Once high temperature, drought or rainstorm affect crop growth, the supply in the international market is bound to tighten, causing price increases.

 

The World Bank pointed out in its "Commodity Market Outlook" report that, based on historical experience, El Ni ñ o usually leads to an increase in agricultural product prices. Due to abnormal rainfall and temperature, the prices of agricultural products such as grains and vegetable oils are often greatly affected, so governments and markets around the world will pay attention to the development of El Ni ñ o in advance.

 

In a recent survey conducted by the Brazilian central bank, interviewed economists generally predict that a new round of El Ni ñ o will push up inflation in Brazil from 2026 to 2027, with food prices being the most affected. Brazilian Central Bank Governor Gabriel Galipolo stated that El Ni ñ o is one of the important risk factors affecting future inflation trends.

 

Abnormal weather conditions may also drive up energy demand. Hot weather increases cooling power consumption, while drought affects hydroelectric power generation. Some countries have to increase the use of fossil fuels such as natural gas and coal, which in turn affects the international energy market. The rise in food and energy prices will also push up the Consumer Price Index (CPI), increasing inflationary pressure.

 

The IMF previously released a working paper analyzing that the impact of El Ni ñ o on the economy will be transmitted globally through trade, energy, and commodity prices. Research predicts that this climate phenomenon may push up global non energy commodity prices by about 5% and persist for six months to over a year. Some countries may also experience varying degrees of increase in food prices and overall inflation, with developing economies being more affected.

 

Understand the new sources of economic risks

 

El Ni ñ o is not only a climate phenomenon, but also a mirror reflecting the increasingly close connection between the global economy and the natural environment.

 

On the one hand, the global industrial chain is more closely connected. Extreme weather that occurs near major grain producing areas, mineral resource countries, or shipping routes may quickly spread to global markets. The Panama Canal Authority recently announced that it will further lower the maximum draft limit for transit vessels due to the potential impact of El Ni ñ o on sustained drought. This will inevitably lead to an increase in global shipping costs. In addition, high temperatures and droughts may also affect the extraction of resources such as copper and lithium mines, increasing manufacturing costs.

 

On the other hand, in the context of global climate change, the frequency and intensity of extreme weather events are constantly increasing. More and more research suggests that the risks facing the global economy in the future will not only come from traditional factors such as financial crises and geopolitical conflicts, but climate change will also become an important variable affecting growth, inflation, and trade. In recent years, institutions such as the World Bank and IMF have been calling on countries to enhance the resilience of agriculture, energy, and supply chains to cope with the economic impact of climate risks.

 

In today's world where the global industrial chain is deeply integrated and extreme weather is becoming more frequent, understanding El Ni ñ o is also understanding the new sources of risk for the global economy. In the future, how to reduce the impact of extreme weather on the economy will become a long-term issue faced by all countries.