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Special Report: El Niño in 2015 Can Have Significant Effects on Economies and Markets

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By: An Hodgson

The effects of El Niño, a climatic phenomenon that can disrupt weather patterns, have been seen in parts of the world since 2015, impacting economies, markets and consumers. While some countries in Asia Pacific and other regions can experience poor harvests due to dryness and heatwaves, the USA can benefit from El Niño owing to more rainfall and warmer winters. Reduced crop output can result in food price hikes, triggering inflation and higher costs for countries that rely on imported food.

Key points

  • El Niño is a phenomenon that occurs irregularly in the tropical Pacific Ocean every two to seven years and affects weather all around the world. Scientist have confirmed the arrival of an El Niño event in March 2015 and warned that its effects could last until the end of the year;
  • The El Niño in 2015 is likely to bring reduced rainfall and dryness in Southeast Asia, Australia, India and West Africa, affecting production of major crops in these countries. Agriculture plays an important role in many economies including Vietnam, Indonesia, India and the Philippines. In 2014, gross value added (GVA) from agriculture, hunting, forestry and fishing accounted for 14.3% of Indonesia’s total GVA. Meanwhile, El Niño weather shock can actually benefit the USA as it helps to reduce drought in California, diminish tornadic activity and hurricanes, and bring warmer winters;

  • Due to its possible negative impacts on crop output in some major agricultural producing countries, El Niño can trigger increases in global food prices. Thailand and Vietnam together accounted for 10.8% of the world’s total rice production in 2014;
  • Higher commodity prices will have knock-on impacts on inflation and negatively affect consumers’ disposable income. India’s annual inflation stood at 6.4% in 2014, down from 10.9% in 2013. Countries that are dependent on food imports such as Egypt, Nigeria and Bangladesh are most vulnerable to rising food prices. Imports of food and live animals accounted for 12.5% of Egypt’s total import bills in 2014;
  • Due to climate changes, El Niño is likely to happen more often over the coming years. This prompts countries to improve their disaster preparedness and disaster forecast services and management. Above all, countries need to strive for lower emissions of carbon dioxide (CO2), the major cause of global warming. The global CO2 emissions increased by 17.7% during to 2009-2014 period to reach 34.6 billion tonnes in 2014.

Growing El Niño risk for late 2015 

  • Leading meteorological agencies around the world have warned about the risk of a moderate to strong El Niño event for late 2015. Southeast Asian countries have actually experienced warmer-than-average temperatures and dryness since March 2015, while a widespread warming of sea surface temperatures has been confirmed by the Australian Bureau of Meteorology, a well-known agency that closely watches this climatic phenomenon;
  • El Niño is a major climate event as it can disrupt weather patterns around the world due to a huge release of heat from the Pacific Ocean into the atmosphere. The El Niño phenomenon is therefore often linked to huge storms, droughts and flooding. According to the Centre of Research on Epidemiology of Disasters (CRED), storms, droughts and floods were responsible for 17.6% of total deaths and 63.4% of total damage costs caused by all natural disasters globally during the 2009-2014 period;
  • Global warming is considered to be a factor that makes extreme El Niño events more likely to happen. The global CO2 emissions from the consumption and flaring of fossil fuels– a major cause of global warming – increased by 17.7% during to 2009-2014 period to reach 34.6 billion tonnes in 2014.

El Niño has mixed impacts on countries 

Although each El Niño is different and has different impacts, several countries are likely to be more affected by the El Niño event in 2015:

Southeast Asia can experience dryness and harsh monsoons, while Australia can be hit by severe droughts. Reduced rainfall can also happen in India and West Africa. This will negatively impact agricultural production and output in the regions, with implications to the countries’ economic growth. Agriculture plays an important role in many economies in Asia Pacific. In 2014, GVA from agriculture, hunting, forestry and fishing accounted for 16.8% and 19.7% of total GVA in India and Vietnam respectively;

Share of GVA from Agriculture, Hunting, Forestry and Fishing to total GVA in Selected Countries: 2014

El-Nino-GVA

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)

  • Meanwhile, the southern part of Africa as well as Kenya and Somalia may see abundant rainfall towards the end of the year, resulting in flooding. Above-average rainfall and heat waves may also happen in Brazil and Uruguay, negatively affecting plantations of major crops including coffee and cereals. Brazil’s production of cereals reached 108 million tonnes in 2014, up by 52.4% since 2009;
  • For the USA, El Niño can result in diverse changes in weather including more rainfall in California, fewer Atlantic hurricanes, a milder winter for most parts of the country, as well as a more active typhoon season in the Pacific. Most of these changes would be beneficial for the USA, as more rain is needed to end the drought in California. Also, a milder winter is welcome since two consecutive harsh winters in 2014 and 2015 slowed business and construction activity and took a toll on the US economy.

Implications for markets, businesses and consumers

  • Poor harvests in major agriculture producing countries due to El Niño impacts can lead to increases in prices of staple foods such as rice, coffee, soybeans, sugar and cocoa on the global agricultural markets. For example, in Vietnam and Indonesia (among the world’s largest robusta bean growers), dry weather since mid-2015 has already triggered concerns about coffee output. Due to slowing demand, the global price index for food (2010=100) declined from a peak of 120 in 2011 to 113 in 2014;
  • Food importing countries will be negatively affected in the case of food price hikes. In 2014, the USA, Germany and Japan were the world’s top importers of food and live animals. Nevertheless, developing countries which are dependent on imports to meet their food demand such as Egypt, Nigeria and Bangladesh are most vulnerable to rising food prices. Imports of food and live animals accounted for 12.5% of Egypt’s total import bills in 2014;

Exports and Imports of Food and Live Animals in Selected Developing Countries: 2014

Food-import-export

Source: Euromonitor International from United Nations (UN), International Merchandise Trade Statistics

  • Higher food prices in some countries can put upward pressures on inflation, negatively affecting consumers’ disposable income. High inflation remains a concern in countries such as India and Nigeria where annual inflation rate stood at 6.4% and 8.0% in 2014 respectively;
  • Deficient rain and low river currents can also affect hydropower generation in some countries, resulting in energy shortages and/or higher demand for coal and crude oil. In Vietnam, electricity produced by hydroelectric generation made up 44.5% of the country’s total electricity production in 2014. In Indonesia, a lack of hydropower can affect the country’s mining industry since its mining equipment relies heavily on hydropower.

Prospects

  • According to a report from the Global Information and Early Warning System (GIEWS) of the United Nations’ Food and Agricultural Organization (FAO), there is an 80.0%-90.0% chance that El Niño will continue until the end of 2015. This requires a close monitoring of El Niño developments and appropriate response measures, especially in regions where the main cropping season has just begun, like Southern Asia and East and West Africa;
  • Over the coming years, climate changes will tend to increase the number of weather-related disasters. Emerging and developing countries are often more affected by natural disasters, owing to not only their geographic locations in disaster-prone regions, but also a lack of disaster preparedness, reliable hazard forecast services and disaster management. Improvement in these areas would prove to be cost-effective in the long run and should greatly reduce the impact of natural disasters.

 

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