Ex­treme weather and global growth

Financial Mirror (Cyprus) - - FRONT PAGE -

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 Niño – 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.

Ex­treme weather cer­tainly throws a ringer into key short­term macroe­co­nomic sta­tis­tics. It can add or sub­tract 100,000 jobs to monthly US em­ploy­ment, the sin­gle most­watched eco­nomic statis­tic in the world, and gen­er­ally thought to be one of the most ac­cu­rate. The im­pact of El Niño-re­lated weather events like the one this year (known more pre­cisely as “El Niño 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 Niño 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 Niño events tend to be in­fla­tion­ary, in part be­cause low crop yields lead to higher prices.

Af­ter two crazy win­ters in Bos­ton, where I live, it would be hard to con­vince peo­ple that weather doesn’t mat­ter. Last year, the city ex­pe­ri­enced the largest snow ac­cu­mu­la­tion on record. Even­tu­ally, there was no longer any place to put it: four-lane high­ways nar­rowed to two lanes, and two-lane roads to one. Roofs col­lapsed and “ice dams” build­ing up from gut­ters caused se­vere flood­ing. Pub­lic trans­port closed, and many peo­ple couldn’t get to their jobs. It was a slow- short­falls. The last se­vere El Niño, in 1997-1998, which some called the “El Niño of the Cen­tury,” rep­re­sented a huge set­back for many de­vel­op­ing coun­tries.

The eco­nomic ef­fects of El Niño 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 Niño 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 Niños 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.

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