World Economy

Extreme Weather and Global Growth

Extreme Weather  and Global GrowthExtreme Weather  and Global Growth

Until recently, the usual thinking among macroeconomists has been that short-term weather fluctuations don’t matter much for economic activity. Construction hiring may be stronger than usual in a March when the weather is unseasonably mild, but there will be payback in April and May. If heavy rains discourage people from shopping in August, they will just spend more in September.

But recent economic research, bolstered by an exceptionally strong El Nino–a complex global climactic event marked by exceptionally warm Pacific Ocean water off the coast of Ecuador and Peru–has prompted a rethink of this view, Kenneth Rogoff wrote for Project Syndicate.

Extreme weather certainly throws a ringer into key short-term macroeconomic statistics. It can add or subtract 100,000 jobs to monthly US employment, the single most-watched economic statistic in the world, and generally thought to be one of the most accurate. The impact of El Nino-related weather events like the one this year (known more precisely as “El Nino Southern Oscillation” events) can be especially large because of their global reach.

Recent research from the International Monetary Fund suggests that countries such as Australia, India, Indonesia, Japan, and South Africa suffer adversely in El Nino years (often due to droughts), whereas some regions, including the United States, Canada, and Europe, can benefit. California, for example, which has been experiencing years of severe drought, is finally getting rain. Generally, but not always, El Nino events tend to be inflationary, in part because low crop yields lead to higher prices.

The US as a whole did not have a winter as extreme as New England’s in the first part of 2015, and the effects of the weather on the country’s overall economy were subdued. Eastern Canada suffered much more, with severe winter weather playing a role (along with lower commodity prices) in the country’s mini-recession in the first half of the year.

This year, thanks in part to El Nino, weird weather is the new normal. From Russia to Switzerland, temperatures have been elevated by 4-5 degrees Celsius, and the weather patterns look set to remain highly unusual in 2016.

  Effects on Developing Countries

The effect on developing countries is of particular concern, because many are already reeling from the negative impact of China’s slowdown on commodity prices, and because drought conditions could lead to severe crop shortfalls.

The last severe El Nino, in 1997-1998, which some called the “El Nino of the Century,” represented a huge setback for many developing countries. The El Nino of 1997-98 has served as a warning and one that must be heeded if similar consequences are to be avoided in the future.

The economic effects of El Nino events are almost as complex as the underlying weather phenomenon itself and therefore are difficult to predict. When we look back on 2016, however, it is quite possible that El Nino will be regarded as one of the major drivers of economic performance in many key countries, with Zimbabwe and South Africa facing drought and food crises, and Indonesia struggling with forest fires.

In the American Midwest, there has lately been massive flooding.

There is a long history of weather having a profound impact on civil strife as well. Economist Emily Oster has argued that the biggest spikes in witch burnings in the Middle Ages, in which hundreds of thousands (mostly women) were killed, came during periods of economic deprivation and apparently weather-related food shortages.

Some have traced the roots of the civil war in Syria to droughts that led to severe crop failure and forced a mass inflow of farmers to the cities.

On a more mundane level (but highly consequential economically), the warm weather in the US may very well cloud the job numbers the Federal Reserve uses in deciding when to raise interest rates. It is true that employment data are already seasonally adjusted to allow for normal weather differences in temperate zones; construction is always higher during spring than winter. But standard seasonal adjustments do not account for major weather deviations.

Overall, the evidence from past El Ninos suggests that the current massive one is likely to leave a significant footprint on global growth, helping support economic recovery in the US and Europe, while putting even more pressure on already weak emerging markets. It is not yet global warming, but it is already a very significant event economically–and perhaps just a taste of what is to come.