El Niño: Ocean hot spot brings economic risks

Jeremy Lawson (pictured), chief economist at Standard Life Investments comments on the economic impact of El Niño.

Few phenomena demonstrate humans’ vulnerability to weather extremes like El Nino. In simple terms El Niño refers to the warm phase of a cycle of changing seasurface temperatures off the Pacific coast of South America. However, its impacts stretch far beyond a small corner of the Pacific Ocean. Among the most important are: droughts in Australia, Indonesia, the Philippines, West Africa, Southern Africa and India; warmer-than-normal winters in the northern US and Canada; heavier-than usual rainfall in the south-west US and west coast of South America; and a weaker
Atlantic hurricane season.

Most meteorological models suggest that an El Niño has developed in recent months. This will be the first such episode since 2009/10. The economic effects of this El Niño will depend on its intensity. Climatologists divide El Niño episodes into four types – weak, moderate, strong and very strong. The last very strong episode was in 1997/98. We will not know how strong the current El Niño episode will be until the second half of the year when it reaches its maximum intensity. Nevertheless, there are some impacts, both negative and positive, that we should watch out for over the coming months.

According to recent analysis by researchers at the IMF and the University of Cambridge, the large countries where growth is most negatively impacted by El Niño are Indonesia, South Africa,
Australia, New Zealand and India. For the most part these are the countries that are highly susceptible to drought and are large producers and exporters of agricultural commodities. The most positively affected countries include Mexico, Canada, the United States and Argentina, where the climactic changes lead to more favourable temperature and rainfall patterns for producers. Indeed, this El Niño could be the force that finally breaks the severe Californian drought that has devastated that state’s farmers over the past
couple of years.

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