According to Bloomberg News the Reserve Bank of Australia is going to have to lower interest rates because of the weather. The worst El Niño in 18 years is causing high temperatures and drought Down Under. Lower growth rates are forecast.
The strongest El Niño in 18 years and cooler ocean temperatures around Indonesia will combine to produce weather that parches Australia’s farms and ranches. The fall in rural production would compound problems in an economy already struggling with slumping commodity prices and record-low private-sector wage rises.
The world’s driest inhabited continent is confronting scorching temperatures that Goldman Sachs Group Inc. says threaten to cut growth in 2016 to the weakest in 24 years and could pressure the central bank to reduce interest rates from an already record-low 2 percent.
This is just one of the expected economic effects of El Niño. All of South Asia will likely see lower crop production as rain ceases. The USA will see a mixed picture.
El Niño in the USA and around the World
Drought forecasting by the National Drought Mitigation Center refers to ENSO or El Niño Southern Oscillation events, the scientific description of ocean current and wind shifts in the Southern Pacific that set up El Niño.
Every two to seven years off the western coast of South America, ocean currents and winds shift, causing water temperatures to warm and displacing the nutrient-rich cold water that normally wells up from deep in the ocean. The invasion of warm water disrupts both the marine food chain and the economies of coastal communities that are based on fishing and related industries.
In North America, particularly the United States, the impacts of El Niño are most dramatic in the winter. El Niño produces winters that are generally mild in the northeast and central United States and wet over the south from Florida to Texas. Alaska and the northwestern regions of Canada and the United States can be abnormally warm. This might be a result of the forcing caused by a Pacific-North American (PNA) pattern that is typified by a high pressure ridge over northwestern North America and a low pressure trough in the southeastern United States. This serves as an upper-level steering mechanism for moisture and temperature at the surface. Once the pattern is entrenched, regions under the ridge can expect little in the way of precipitation while those in the trough can’t turn it off and are prone to frequent flooding.
During an ENSO event, drought can occur virtually anywhere in the world, although researchers have found the strongest connections between ENSO and intense drought in Australia, India, Indonesia, the Philippines, Brazil, parts of east and south Africa, the western Pacific basin islands (including Hawaii), Central America, and various parts of the United States. Drought occurs in each of the above regions at different times (seasons) during an event and in varying degrees of magnitude.
The direct economic effects of El Niño are on agriculture and infrastructure. Both drought and flooding reduce crop production and flooding damages bridges and highways as well as buildings. Other economic and social effects follow.
El Niño and Commodity Prices
Equities.com discusses U.S. grain markets and the 2015 El Niño looks at the last bad occurrence in 1997.
The National Oceanic and Atmospheric Administration (NOAA) has repeatedly stated the growing case for the 2015-2016 El Nino event. While much has been discussed in the headlines, very little of the conversation has focused on the commodity price impact that the most significant El Nino weather pattern since 1997 could have on U.S. crops. This week, we’ll begin our look at how the U.S. grain markets performed during 1997-1998 El Nino and continue this line of thought through the global grain markets next week before finishing this segment with a look at El Nino’s impact on energy prices.
An important point of this article is that while 58% of corn production is in the USA and China (36% and 22%), Brazil and Argentina combined now out produce the USA in soybeans. The extent that commodity production is globalized it reduces the risk of huge fluctuations in case of flooding or drought.
When one part of the global interconnected economy suffers the effects are felt everywhere. A prolonged and severe El Niño will cause not only economic chaos in some areas but social unrest as well. Islamic extremists have benefitted from a prolonged drought across Syria and Iraq. The economic effects of El Nino could precede social and political turmoil in unstable societies across the globe.