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factors play a more significant role in determining food prices in advanced economies. Factors such as processing, packaging and retailing costs have a greater influence. For example, there is little correlation between annual changes in the global sugar commodity price and CPI inflation in sweet goods like biscuits, sweets and jam in major developed markets.
El Niño may also exert upward pressure on gas and coal prices due to reduced hydropower generation in Asia or increased demand for air conditioning. This could lead to higher energy inflation and contribute to any upward pressure on food prices. Notably, energy prices were the primary driver of higher food inflation in advanced economies last year, while the decline in agricultural commodity prices during that period had minimal impact.
“In all, we estimate that the combined contributions of food and energy could be around half a percentage point larger in a “strong El Niño” scenario over the next year than under our baseline scenario. That would leave average advanced economy inflation at 3% rather than 2.5%. But we would stress that the effect is highly uncertain and global demand and labour market conditions will be the more important determinants of food and energy inflation as well as price pressures generally in the advanced economies,” Capital Economics said.
.. but Emerging Markets at greater risk
The impact of El Niño on emerging markets could be more severe for several reasons. First of all, food constitutes a significant portion of the consumer price basket in these markets. Since processed foods are less commonly consumed and labour costs tend to be lower, the prices consumers pay are more closely linked to raw commodity prices compared to advanced economies. Historical data indicates that El Niño conditions often coincide with higher food price inflation in
emerging markets. The risks are particularly pronounced in Africa and South Asia, where food comprises a significant share of CPI baskets.
Secondly, a decrease in agricultural production will directly affect the GDP of certain emerging markets. Cocoa (predominantly from Côte d'Ivoire and Ghana), sugar (especially from India and Thailand), coffee (Vietnam and Indonesia) and rice (Philippines and Thailand) are among the key commodities at risk.
Agriculture plays a larger role in the GDP and employment of Africa and South Asia compared to other regions, making these areas particularly vulnerable to the impact of a strong El Niño.
A significant reduction in crop volumes available for export could strain the balance of payments in some economies. Certain regions in Africa, as well as Laos, stand out as being reliant on agricultural exports while simultaneously facing substantial external vulnerabilities.
Thirdly, there could be broader economic consequences. Several countries, primarily in Africa, heavily rely on hydroelectricity for power generation. A decrease in rainfall could hinder electricity production and potentially lead to power rationing. Additionally, heavy rainfall in Chile has already disrupted the country's copper mining industry.
“In all, the prospect of an El Niño event has not led us to change our forecasts at this stage, given the uncertainties around
its strength and the impact on commodity production and prices. However, it has increased upside risks to inflation and downside risks to activity which will only worsen the dilemma for central banks. The risks are greatest in EMs, where El Niño conditions threaten to prevent more central banks from cutting interest rates and could cause balance of payments strains to intensify for some,” Capital Economics concludes.
Confidence in wind industry rocked by quality problems at turbine maker Siemens Gamesa
Roberta Harrington in Los Angeles
Quality problems at wind turbine manufacturer Siemens Gamesa – one of the world’s largest – have rocked confidence in the wind sector. This followed
a surprise statement by Siemens Energy on widespread issues with wind turbines at its subsidiary, knocking nearly €7bn ($7.6bn) in a day off the value of the parent.
As a result, Siemens Energy scrapped its profit forecast for the year.
Between 15% and 30% of installed Siemens Gamesa turbines may have significant component failures, said executives.
Late on June 22, Germany-based Siemens Energy announced that a review of technical issues at its struggling subsidiary Siemens Gamesa had found a “substantial increase in failure rates of wind turbine components”.
The board of the Madrid-based subsidiary has initiated
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