International | Jun 21 2023
The world appears set to shift into an El Nino phase. Oxford Economics assesses the potential impact on crops, food prices and CPI.
-El Nino plus climate change equals trouble
-Disaster costs do not much impact global GDP
-Food production swings both ways
-Food price deflation may nevertheless be unlikely
By Greg Peel
The El Nino-Southern Oscillation (ENSO) is a three-phase climate cycle (El Nino, La Nina, and neutral). The world periodically flips from one phase to another and the intensity and the evolution of the cycle can be forecast several months in advance, though the duration of each phase naturally varies over time.
The ENSO cycle can cause temperatures to be hotter or cooler than normal, notes Oxford Economics. It's a natural cycle that's been taking place for millennia, whereas climate change is a long-term shift in the earth's weather patterns and temperature. The shift into the El Nino phase of ENSO this year could have economic repercussions from two developments:
Firstly, higher global temperatures. Between 2020 and 2022, the world was in an unusually long “triple-dip” of the cooler La Nina phase. Despite this, global temperatures were still among the hottest on record, Oxford notes.
In an El Nino phase, higher global temperatures typically occur a year after its onset. As a result of this shift and climate change, the World Meteorological Organization (WMO) assigns a 98% probability to the average temperature from 2023 to 2027 being hotter than the past five years.
This suggests more frequent and severe wildfires and power outages are possible, with the greatest effects experienced in those economies where average temperatures are highest. That said, the extent of any warming from El Nino is highly uncertain, Oxford points out, and it's only one of many factors that will determine global temperatures over the next year or two.
Secondly, more volatile weather and extreme events. El Nino may also trigger more disruptive weather patterns that cause damage to property and infrastructure and disrupt economic activity. Parts of South America will be at increased risks from floods, while Australia and Indonesia may be more prone to drought. Oxford’s climate change analysis shows greater temperature volatility can have bigger economic consequences than higher average temperatures.
But it would be wrong to attribute any extreme weather events over the next two years purely to El Nino, Oxford notes. The human costs of extreme weather and other natural disasters were substantially higher between 2000-2019 than the preceding 20 years.
What's more, some regions that have been affected by La Nina may benefit from a shift to less troublesome weather. The Horn of Africa, which has been blighted by drought over recent years, may benefit from increased rainfall during El Nino and likely dryer conditions could reduce the risk of a repeat of the recent catastrophic flooding in Pakistan.
The main concern from the changing ENSO cycle is it brings more catastrophic events such as wildfires or floods creating humanitarian crises and major ecological damage. Such events may also have economic costs, which are Oxford Economics’ key focus here.
Cost and Economic Impact
At a global level, total annual damage costs from natural disasters are typically small when measured as a share of annual world output, Oxford notes. In 2011, a bad year for natural disaster damage, the estimated global damage cost was about 0.5% of nominal US dollar-weighted global GDP. From 2019 to 2021, the cost has averaged just under 0.2% of global GDP.
Oxford also notes during the three most intense El Ninos of the late 20th century in 1982/83, 1997/98 and 2015/16, the damage from natural disasters wasn't substantially higher than normal.
Source: Oxford Economics/Our World in Data
It's also important to note the economic damage from natural disasters and the impact on economic activity are two very different concepts. While both damage and disruption are clearly undesirable costs of natural disasters, the damages bill is typically much larger than the cost in terms of lost output caused by disruption.
At a global level, the hit to economic activity from natural disasters would also be expected to be smaller than the repair bill. The odds of extreme weather pushing larger regions or the world economy on to a significantly lower growth path appear to be very low, Oxford suggests.
If natural disaster damage from a combination of El Nino and climate change were unusually high in 2024, could this have substantial spillovers to other regions, intensifying the overall impact on global activity? Oxford notes media reports have typically flagged two risks from unusually hot and volatile weather in 2024: renewed supply chain pressures and higher food prices.
Oxford agrees phenomena such as wildfires, floods, and blackouts all have scope to disrupt production substantially in the affected areas. But for weather events to have big spillovers to supply chains beyond the affected area would likely require the affected areas to be major suppliers of particular products.
While extreme weather could trigger supply chain problems, spillovers are likely to be focused on a small number of industries and any disruption is likely to be national or regional, rather than global.
More Food Inflation?
One bigger concern, Oxford suggests, could be worries that El Nino might prompt a further upward leg in food prices. India's government is reportedly already responding to the threat of lower rainfall as a result of El Nino by considering capping sugar exports. Other governments could take similar steps to reduce the risk of domestic shortages of other foodstuffs.
Academic work typically suggests the impact of ENSO on key crop yields is small at a global level. While yields from large areas of cultivated land may fall significantly due to El Nino or La Nina, potentially causing price surges in these regions, other regions may benefit from significantly higher yields.
Source: Oxford Economics/Juan Cao, Zhao Zhang, Fulu Tao, Yi Chen, Xiangzhong Luo, Jun Xie – Forecasting global crop yields based on El Nino Southern Oscillation early signals, Agricultural Systems
Given the ENSO cycle is to some degree predictable, commodity prices should already reflect the expectation that El Nino will influence agricultural output to some extent, Oxford suggests.
Analysis from the European Central Bank points to a 6% rise in global food prices in response to a one degree Celsius increase in temperatures due to El Nino. While any increase in food prices would be unwelcome at the present juncture, neither set of figures are particularly large given the broader volatility of food commodity prices, Oxford submits.
However, an International Monetary Fund Working Paper also shows ENSO can account for almost 20% of real commodity price inflation over a multi-year period, suggesting that El Nino may provide grounds not to bank on significant food price deflation ahead.
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