June just rains and never stops thirty days and spoils the crops. Hello Stephanomics, here the podcast that brings you the global economy, and if you'll forgive the indulgence, a bit of Flanders and Swan. That was from the Song of the Weather, written back in the nineteen fifties by my father Michael Flanders and his partner Donald Swan. We Brits were famous for talking about the weather long before it was fashionable. But now everyone's doing it and it's
no joke. Climate change is an inescapable part of our daily lives, with a growing impact on the economy and policy in most of the world. Increasingly extreme weather gets top billing on the nightly news. We're also becoming better
informed about weather phenomena such as El Nino. So as you probably already know, al Nino is a period of warmer temperatures in the eastern part of the Pacific around the Equator, which can have knock on effects for the weather and much else in many different parts of the world. Recent Alninio's have seemed to become more intense, and the US Climate Protection Center has said there is a more than ninety percent chance of one unfolding later this year
for the first time in four years. If basic crops are affected in poorer economies and food prices go up as they have in the past, that would be bad news. Indeed, after everything the global economy has been through in the past few years. In a few minutes, I'll hear more about what we might have to expect from a strategist
at Deutsche Bank who's looked at the historical record. I'll also talk to a global economist from Bloomberg Economics who's made a stab at estimating exactly how prices and growth could be affected in different parts of the world. But first, here's Bloomberg's LAWA Curtis with related news from that crucial artery of global trade, the Panama Canal.
Water levels in Panama's Gatoon Lake are falling fast and are projected to hit historic clothes by the end of July. Making matters worse, an al Nino system is forming, which typically makes the region hotter and drier than usual, and the water shortages could stretch into twenty twenty four. But wait, this is a podcast about economics, so why are we talking about a drought in Central America? Well, remember just a few short years ago, when we were all waiting
out the pandemic. Stuck in our houses as we waited months for the new sofas and grills and other consumer goods to arrive, all that stuff was stuck on ships and in containers as a supply chain seized under pandemic pressure and consumer demand. We know now that the crunch caused shortages and delays that caused a huge spike in shipping costs and eventually helped spur the inflation rate to a four decade high, which the Federal Reserve has only just started to get under control.
The Panamacanal is one of the essential what we call maritime chokepoints, because this basically cuts massive sailing distances very short when you can transit the Panama Canal. The Seuiz Canal is another one. Turkish straits a third one.
That's Peter Sand, chief analyst at freight data company Zanita.
It involves all kinds of supply chains of energy and commodities, and naturally also for containers shipping. It's a vital artery for containers traveling from far Eastern manufacturers into the US East Coast if they do not go via the Zeus.
Canal, Cattuned Lake feeds the Panama Canal with fresh water to lift huge container ships eighty five feet above sea level and through twelve locks from the Pacific Ocean to the Caribbean. To manage low water levels, the canal has started to impose surcharges and draft limits, or how low the vessels can sit in the water, and that means they can carry less stuff.
We have a really very volatile supply chain infrastructure.
Stephanie Loomis is head of Ocean product for the Americas at Germany based Rina's Logistics. They're a freight forwarder, or, as she describes it, a travel agent for cargo. She's not too concerned about the drought just yet. There's just so much more capacity available on ocean liners compared to this time last year, and shipping rates are low for now. But there are other things worth watching that could compound the risk to supply chains.
It doesn't take much to knock it off center and right now we've got several pretty major things brewing that if they should all come to the surface at the same time, we could be in deep trouble again.
For those of you listening in Europe, some of this may sound familiar. The Rhine River, which stretches hundreds of miles from the Alps to the North Sea, is all already seeing water levels low enough this season to restrict trade, and fuel shipping costs have skyrocketed. The river is used to transport millions of tons of oil products and other vital commodities across Europe. Last year it got so low that trade was severely disrupted, affecting oil refining, power generation,
and more. The supply chain world led out a collective sigh of relief last week when US West Coast dock workers and their employers reached a tentative contract agreement after more than a year of talks, but the deal is still subject to approval by the union's local chapters.
It took a two week wave.
Of labor disruptions to ultimately get the White House involved, and those port slowdowns had a knock on effect. At the Panama Canal.
On first June, there was no waiting time whatsoever around the new Panamax looks going northbound as from from Asia to the US East Coast bound. But what we have right now in the middle of June, we have five to six days of waiting.
As draft restrictions continue to tighten through the summer, will likely see more congestion and higher fees. For now, the canal limits are manageable for most shippers, especially the largest US retailers bringing in backpacks and kids shoes ahead of the back to school season. The businesses moving around heavier stuff like building materials and machinery could already be feeling the pinch.
So you could see tile and granite and marble. If the freight costs, I mean, if you have to split that container, you have to split that shipment into two containers, you're essentially doubling your freight costs just like that. So this could impact some of these commodities costs to the consumer.
Costly isn't a word that inflation hawks at the Federal Reserve want to hear. Even as the fight against in flat has been helped by falling shipping prices, price pressures are still proving to be stickier than many had hoped, running at about double the Central Bank's target of two percent. Georgetown economics professor and former IMF official Jonathan Austry says policymakers should keep an eye on the supply chain.
First up, What we discovered was that the impact of rising shipping costs are much more persistent than the impact of rising energy and food prices, which is what we're grabbing the headlines in late twenty twenty one. In the second half of twenty.
Twenty one, Austria and his colleagues found that the twenty twenty one bottlenecks, which caused a six hundred percent spike in the cost of shipping containers over the ocean from pre COVID levels, increased consumer price inflation globally by more than two percentage points in twenty twenty two, and for remote small island nations in the Pacific and Caribbean that rely heavily on imported goods, it added nearly another five percentage points.
Shipping costs are a canary in the coal mine. They do tell us about future inflation.
Ostre says, even with low base prices, a shipping cost increase of twenty percent boost the inflation rate yo point one to five percentage point a year later.
I think the warning is here. If the drought and El Nino converge to cause shipping costs to again spike. In the second half of twenty twenty three, that should be in top of mind for FED policy makers, because again what we would expect is that that would be a contributing factor that weighs against the fed's disinflation effort.
Sand and Loomis say if this drought had hit the canal last year, when the pandemic cargo surge was in full swing, it would have been a complete disaster. But with cargo volumes back closer to twenty nineteen levels, there's enough slack in global trade lanes to ensure presents are
on store shelves in time for the holidays. But water levels in panama are still projected to hit record lows by July, and for businesses that just realign their supply chains to be closer to consumers on the East Coast or to distribution centers on the Gulf Coast, rerouting all that stuff back through California Port could be an expensive headache.
I'm not calling doom and gloom here, but I think we need to look further ahead also into twenty four because that's when the next dry season is about to see in Panamaica. Now and if we do not see the watershed filled up during the second half of this year, going into an ear year that is likely to bring around a longer low, say drought season or dry season than a normal year. We could end up with even
lower water levels in twenty twenty four. So this may be the starter for full dinner ser next year.
For Bloomberg News. I'm Laura Curtis in Los Angeles.
Now you heard there that the Federal Reserve and other central banks might have reason to worry if Al Nino in the second half of this year ends up raising shipping costs. So what are the chances of that happening,
and more broadly, how bad could those impacts be. Well, I can talk to two people now who've spent some time looking at this from the economic standpoint, Henry Allen, Macro's strategist at Deutsche Bank in London, and our own Barga vi Shaq Develle from Bloomberg Economics, a global economist. Welcome to both of you. Henry, since you're our guest, why don't you give us some context for thinking about this.
How often have we seen El Nino have a significant impact on the economy in the last sort of generation or so.
So the El Nino is a warming of the sea surface temperatures, in the Pacific, and that might sound kind of quite benign on one level, but the problem is that that causes the jet stream to move south, and that in turn is correlated with a higher frequency of natural disasters. Now, normally this is a regular cyclical pattern that happens around every two to seven years on average.
But what's really generating concerned this time are predictions from a number of climate agencies that this particular episode is going to be a strong one. So for instance, we last saw an El NINU in twenty eighteen nineteen, but
that was quite a weak one. But this, at least according to the US Climate Prediction Center, could be for just the third time in the twenty first century, a strong EL NINU, and they're saying they think there's a fifty six percent chance that it will hit that strong threshold deeper into this year, around December January time.
I think that the most recent sort of serious time in your piece you discussed was sort of between twenty fourteen and twenty sixteen. So what kind of impacts do we see there?
So there were several Firstly, you had actually in twenty sixteen in particular, the biggest upward temperature anomaly on record at the time, that was the highest EPP temperature that the world had seen. You saw a higher frequency of hurricanes in the Pacific. In both twenty fourteen and twenty fifteen, that Pacific hurricane season had sixteen hurricanes, the joint highest
number on record. Further afield, in Africa, you had the worst drought in decades in Ethiopia, a great deal of famine, and one study even found that because it created conditions that were beneficial for mosquito borne transmission, it even contributed to the spread of the Zeka virus. So a number of quite nasty effects for coming together there.
That's one of the things that comes through in every bit of research that I look at is that the sheer range of impacts and the sort of unexpected consequences. And in another one that people are talking about currently is the very very high temperatures in South Asia that are potentially related to this kind of environment are pushing countries to be even more dependent on Russian energy, just at a time when we might have been wanting them
to follow the US led sanctions. I guess the most significant time before twenty fourteen you mentioned was ninety seven ninety eight, so what happened.
Then, so a bit like with the most recent one, the most reason very strong one in twenty fourteen to sixteen. You also had what was at the time again a global record temperature year in nineteen ninety eight, the warmest to date so far. For instance, there were massive rainfalls in California, San Francisco, so it's wettest rainfall season in over a century. You had major droughts in Indonesia, and similarly you actually saw quite a bit of disease as well.
For instance, after major flooding in East Africa, you had an outbreak of rift valley fever in several countries, including Kenya.
And we're talking about it this year. As you mentioned, the US Climate Center has put the probability of an al Nino pattern unfolding at more than ninety percent, but as you said, it's a question at how severe it is likely to be. You're a strategist looking at market impacts as well as the economy. Are we already seeing signs of potential impacts in the markets or people anticipating impacts from El Ninia?
Definitely, I mean the most obvious impact has been among certain agricultural commodities, so One example is coffee futures have recently hit their highest level since one particular contract began in two thousand and eight. You've got sugar prices that are already around their highest level in around a decade, and coco is at a seven year high as well.
And that's consistent with what we've seen around previous Elmineo cycles, whereby in particular agricultural commodities see a big upward shock and that puts upward pressure on inflation intern and.
It is I mean when you say those things, of course, that's people worrying about their coffee, chocolate. We'd certainly have concerns about rice prices, barga vie. I mean, there's the sheer range of impacts that we've talked about so far, whether it's flooding in East Africa or hurricanes in the Pacific, the spread of the Zeka virus in past times. Coming on top of the last twelve months where of course we also had the impact on food prices of Russia's
invasion on Ukraine. How should we think about the potential impact of El Nino this year, on top of all those previous things that have happened in the global economy.
It has been pretty worrying because the only unit, as Henry already mentioned, is going to definitely cause inflationary pressures everywhere. We did like a very simple modeling exercise where we looked at a few countries eleven countries, including the euro area, and tried to understand how this atmospheric pressure that is cost when the minor event occurs, could affect these countries.
And what we found was that almost certainly irrespective of which part of the country, which part of the continent the country belongs to, there would be inflationary pressures, whereas it would definitely be much higher among countries that are in the tropics and the southern hemisphere specifically because these are the countries that I deal primarily with primary sector so agricultural commodity exports, So we would expect that there to be high inflation and lower growth.
And just to put just to put some numbers on this, I mean, obviously there's a lot of uncertainty, but at the global level, are we going to notice this the impact on inflation or so, and certainly on commodity prices. What kind of numbers would we potentially talk about.
Well, I think certain countries would definitely see high increases to Argentina, Brazil, India, Philippines, all these countries would definitely see higher inflation on a more global scale, depending on how severe the only NEA turns out to be, I
think it could be even larger some of these effects. So, for example, in Argentina and Brussel, we expect about a zero point five percentage point higher inflation at an animal level, and depending on how severe and how long the El Nino event actually exists, it could be much much greater.
And given that there are significant spillover effects both from trade and financial linkages, this could easily seep through even to like developed countries or countries that are not directly impacted by these weather phenomena.
And I mean, Henry, I guess the various numbers. I think the sort of we could potentially be adding nearly four percentage points to non energy commodity prices. Obviously much that's going to have to translate into a much smaller impact on global inflation. But as Bargavi said, it varies a lot country by country. Does that sort of broadly tally with what you've been thinking at Deutsche BAC.
Yes, absolutely, I mean One of the things that makes this El Nino phenomenon so hard to predict is that the effects are so variable. So there are parts of the world, for instance, like the southern United States, where it makes flooding a lot more likely. But there are other parts of the world, toicularly the other side of the Pacific, like Indonesian and Australia, where it makes drought
more likely. So it's very hard to kind of find a single aggregate global effect that it has because that impact is so variable according to different regions, and.
I noticed them. And of course when you think about possible places that where it's beneficial to have, for example, more rain. I mean, you know, if you're an avocado or an almond almond grower in California, it's actually quite good news to have more rain. But it's striking when you go through the list the iniquity of how the
pain gets distributed Barga Vie. I mean, this is by and large going to be a much more negative impact and certainly have a bigger impact on inflation in the poorer parts of the world.
And we look at things like how it affects economic growth. We found that Indian and Argentina about zero point five percentage points and that GDP got knocked off, but the effect is going to be much larger for Argentina than a country like India, which has extremely high GDP growth in general, So even if they're equally impacted, I think the smaller, poorer countries whose primary sources of revenue are like output generation, is due to these commodity experts.
And I was struck that we had some even more extreme estimates by some Earth scientists at Dartmouth College in the US, Christopher Callahan and Justin Mankin, who estimated that what Henry was talking about in the late nineties that El Nina had led to nearly six trillion dollars in lost GDP, So that's about a hundred times more than
the previously thought. And their point was that economists are sort of only measuring what we could see got damaged, or we could see that the slowdown in growth that was very clear and apparent at that time, and we're not recognizing that the sort of variability in the weather can hurt economic growth in a prolonged way. So you get persistent shortfalls in output that only unfold over several years,
and as a result of taking those into account. They think you could see a cumulative shortfall in GDP over the next century of maybe eighty trillion dollars or about one percent of global GDP, just because of El Nino. Bargave. You and I were sort of joking that these were just madly big numbers earlier. But do you accept that we are potentially only looking at the tip of the iceberg when we do these straightforward analyses of the impact on food prices or growth.
Yeah, definitely for starters. We haven't even started thinking about other kinds of still over effects of direct effects on these natural as asters bring about them if depending on the severity of the ol ninio, so there definitely could be other reasons that create negative impacts on commodities and
therefore causing inflation. But again, like we joked about earlier, I don't necessarily know if it's going to be that large, but for sure, our simple analysis only looks at the direct effects, and there could be a lot more beneath the iceberg.
Henry, Yeah, I think that's absolutely correct. I mean, one thing that I was quite surprised about reading about the old linear phenomenon was that it didn't just seem to have an impact on food commodities. It was also energy commodities. There seemed to be a positive correlation too. There was one paper, for instance, by the IMF a few years back that found that there was a statistical effect on
energy and oil prices. For instance, if you have droughts that means you get less electricity from hydroelectric dams, you need to find that from other sources. Another thing is that farmers in trout areas need more water for irrigating their crops. So actually the spillover effects don't just stick with food, but they can spread to other categories the inflation baskets.
Well, and I guess, as you mentioned at the starts, is it's technically a warmer phase for the eastern Equatorial Pacific. You know, in many ways it is a sneak preview of what we might see with climate change as we go. As we go forward, and as we get better at measuring the impact of climate change, I guess we get a bit better at measuring the impact of al ninia. Henry Allen and Barga Vi Satjevelle, thank you very much.
Thank you.
Well, that's it for this episode of Stephanomics. Next week we'll have more. In the meantime, you can get a lot more economic insight and news from the Bloomberg Terminal website or app. And for those of you wondering what the weather's like the rest of the year in.
July and Sunny's hot is in shiny now it's not.
Of col and dank and wait.
This episode was produced by Magnus Henrickson, Yang Yang and Summer Sadie, with help from Oscar Boyd. Special thanks to Laura Curtis, Henry Allen, Barga, v Shaq Develle, and Michael Flanders and Donald Swamp. The executive producer of Stephanomics is Molly Smith, and the head of Bloomberg Podcast is Sage Bone.
Bloody.
Januinely again, I hope that's been helpful for those of you are planning your holidays