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30 I Companies & Markets bne August 2023
The World Meteorological Organisation says there is a 90% chance of a "strong El Niño" this year that will send temperatures up and hurt Emerging Markets.
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El Nino effects could add to polycrisis
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The World Meteorological Organisation announced
on July 4 that there is a 90% probability of an El Niño event in the second half of this year that will warm the surface of oceans and add to the climate change impact. That could have a major negative impact on things like food production and energy demand.
El Niño leads to above average sea surface temperatures in the central and eastern tropical Pacific Ocean and occurs every few years. It typically leads to drier weather across West Africa, Southeast Asia and northern South America, and wetter weather in southern South America.
“The likelihood of an El Niño event in the second half of this year adds to upside risks to global inflation and downside risks to activity. For the advanced economies, higher prices of agricultural commodities could slow the decline in food inflation. But the risks are bigger in EMs where food has a higher weight in the CPI and where production could also be damaged,” Jennifer McKeown, chief economist at Capital Economics, and Gareth Leather, senior Asian economist at Capital Economics, said in a note on July 12.
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The potential impact of El Niño on food and energy prices which are already inflated has worried analysts. While
the relationship between El Niño events and agricultural commodity prices has been inconsistent, there are potential upside risks to prices, including sugar, cocoa, coffee, and rice, says Capital Economics. And the Emerging Markets are particularly vulnerable.
Developed markets facing mild impact..
Historical data suggests that the threat to headline CPI inflation in advanced economies is limited. Food comprises an average of 12% of their CPI baskets, with sugar, sweets, coffee and rice components making up around 2% of the basket. During the strong El Niño event in 1997/1998, food inflation rose by a percentage point, adding 0.12 percentage points to the average headline CPI rate in the OECD.
Nevertheless, there is no clear causal relationship, says Capital Economics, and there have been instances where OECD food inflation actually decreased during other El Niño periods. This inconsistency can be attributed to the variable impact on commodity prices, as well as the fact that other