Extreme heat and drought conditions have hit the United States, Europe and China, exacerbating problems for workers and businesses at a time when economic growth is already sharply slowing and upward pressure on prices is mounting. increase.
Ben May, director of global macro research at Oxford Economics, said these events “could be very significant for the specific regions affected”.
The degree of pain depends on how long the heat wave and lack of rain last. But in countries like Germany, experts warn there is little prospect of a bailout, and businesses are bracing for the worst.
Extreme weather and economic slowdown
Not just the Rhine. Across the world, the Yangtze, Danube and Colorado rivers that fuel global growth are drying up, hampering the movement of goods, disrupting irrigation systems and making it difficult to cool power plants and factories.
At the same time, scorching heat is hampering transportation networks, straining power supplies and reducing worker productivity.
Bob Ward, director of policy and communications at the Grantham Institute on Climate Change and the Environment at the London School of Economics, said the heat wave event should not be surprising. “They are exactly what we predicted and are part of the trend. They are becoming more frequent and intense around the world.”
The global economy was already under pressure. High energy prices fueled by Russia’s invasion of Ukraine put Europe at high risk of a recession. High inflation and aggressive rate hikes by the Federal Reserve jeopardize US growth. China grapples with the effects of a severe lockdown and property crisis caused by the coronavirus.
other concerns
Oxford Economics’ May said extreme weather could exacerbate “existing pinch points” along supply chains, which is the main reason inflation is so difficult to bring down.
The province is also the center of China’s lithium mining industry. The shutdown could increase the cost of raw materials, a key component of electric vehicle batteries.
The neighboring city of Chongqing, which sits at the confluence of the Yangtze and Jialing rivers, has also ordered factories to shut down for a week until next Wednesday to save electricity, state media The Paper reported.
As a result, forecasts for the Chinese economy this year have already been revised downwards. Nomura analysts on Thursday lowered his GDP growth forecast for 2022 to 2.8%. That was well below the government’s target of 5.5% for him, and Goldman Sachs lowered its forecast to 3% for him.
Meanwhile, Germany’s shrinking Rhine River is below critical levels, impeding the flow of ships. Rivers are important conduits not only for chemicals and grains, but for commodities including coal, which are in high demand as countries race to fill storage facilities with natural gas for the winter. , it is difficult to find alternative transportation.
“It is only a matter of time before plants in the chemical and steel industries are closed, when mineral oil and building materials do not reach their destinations, and when heavy transport of large volumes becomes impossible,” said Holger Loesch, deputy director of the German Industry Federation. The director said in a statement this week.
Low water levels along the Rhine reduced Germany’s economic output by about 0.3 percentage points in 2018, according to ING’s Global Macro Head Carsten Brzeski. However, in that example, low water levels were not an issue until late September. This time, he estimates, he could push GDP down by at least half a percentage point in the second half of the year.
German economic sentiment continued to decline in August, according to data released this week. Brzeski said the country “will need an economic miracle” to avoid slipping into recession in the coming months.
In the western United States, an unusual drought has dried up the country’s largest reservoir, forcing the federal government to implement new mandatory water cuts. Farmers are also forced to destroy their crops.
Nearly three-quarters of U.S. farmers say this year’s drought is hurting their crops, according to a survey by the American Farm Bureau Federation, an insurance company and lobbying group representing agricultural interests. increase.
The study took place from June 8 to July 20 in 15 extreme drought states from Texas to North Dakota to California, which account for nearly half of the country’s agricultural production. In California, a high-yielding state for fruit and nut trees, 50% of his farmers said they had to cut down trees and multi-year crops due to drought, which would affect future earnings. To do.
Ward, of the London School of Economics, points out that costs will continue to rise without significant investments in infrastructure upgrades. And the impact may not be incremental.
“There are indications that these fever episodes are not just becoming more frequent and slightly more intense over time. will do
— Laura Hee, Sean Deng, Simone McCarthy, Benjamin Brown, Aya Elamursi, Taylor Romijn Vanessa Yurkevich contributed to the report.
