El Niño and its economic impact

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El Niño:
There is a 55% chance that this year’s El Niño, which was declared by the U.S. weather service in June, will be “strong” and a 35% chance that it will be “historically strong”. The strongest El Niño in history in the late 1990s caused billions of damages. The main impact of the weather pattern will be on agricultural output, and as a consequence, on food prices and inflation.

Latin America:
Mexico, the region’s third-largest agricultural exporter, may produce less coffee, fruits and vegetables as a result of lower rainfall; the weather pattern tends to reduce precipitation in the south of the country, along with Central America and the north of South America. In contrast, but with similarly negative effects, El Niño raises the risks of flood and therefore crop damage in Ecuador and Peru, the region’s fifth- and sixth-largest agricultural exporters, respectively. More positively, the weather pattern should boost rainfall in the Pampas region, which will be welcomed by farmers after recent droughts.

South- and South-East Asia:
Cyclones, droughts and flooding are some of the ways El Niño could harm the region’s economy. India’s monsoon this year was the driest in 5 years, with initial estimates by the government suggesting the output of kharif crops—rice, maize, pulses and millets, all of which are harvested in Q4—is down year on year as a result.

Sub-Saharan Africa (SSA):
Roughly 30% of SSA’s GDP is agricultural output. As a result, the region is at significant risk from El Niño. Southern Africa was the continent’s hardest-hit region during the last El Niño in 2015–16, suffering its worst drought in 30 years. The drought peaked in November 2015, in the middle of planting season, causing cereal production to undershoot demand by nearly 10 million tons in the following year’s harvest.

Rice prices are set to remain elevated in 2024 due to the effects of the weather pattern on output in key producers such as India. Meanwhile, adverse weather could also affect the output of sugar in Brazil, India and Thailand. That said, the weather pattern could boost the output of corn, soybeans and wheat via its impact on rainfall in the Pampas region of Latin America. Overall, the Consensus among our panelists is for agricultural prices to fall next year as the global economy slows, though bad weather is an upside risk.

Insights from our analysts

Analysts at ING said:
“We are still seeing another round of food protectionist measures taken by some governments. This is most evident in India. Last year, the government banned wheat exports and more recently, it’s also restricted some rice exports […]. Part of these domestic food security concerns are due to the impact that El Niño is having on the Indian monsoon this season. And the government may also feel it has to take action to ease food prices with an election next year. However, for global markets, these measures risk pushing some agricultural prices higher.”

Analysts at JPMorgan commented:
“The good news is that El Niño should put drought conditions [in Argentina] in the rear-view mirror. We expect exports inflows next year to strongly recover as weather conditions normalize. And thus we forecast exports to increase around US$20bn next year to US$85bn.”

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Click here to access our new special report on the possible economic impact of this year’s El Niño.

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