"Weatherflation Hits Economy"... The Weather's Counterattack

ECB "Food Prices Rise 6% with 1°C Temperature Increase"
Heatwaves Disrupt Production and Logistics
Inflation Rises → Economic Growth Rate Falls
Developing Countries Suffer Most from 'Weather Backlash'

Abnormal climate phenomena such as heatwaves, droughts, and floods, which have become commonplace, are shaking the global economy. The extreme heat is driving up food prices in a phenomenon known as 'weatherflation' (weather + inflation), and disruptions in production and logistics caused by the heatwave are increasingly becoming a reality that could lower growth rates. This is being regarded as the beginning of the so-called 'climate backlash.'

[Image source=Yonhap News]

Heatwave-driven Food Price Increases... Inflation Rises, Growth Rates Fall

On the 16th (local time), The Wall Street Journal (WSJ) published an article titled "The Economy Tamed the Weather. Now the Weather's Counterattack Has Begun," diagnosing that "as extreme events occur more frequently, threats to growth and inflation are increasing, especially in poor countries." Climate change, which countries and societies cannot control, threatens the global economy in various forms such as inflation, labor loss, and disasters. The heatwave that swept the world this summer is no exception. The European Central Bank (ECB) forecasted that if temperatures rise by 1 degree due to El Ni?o, which raises sea temperatures near the equator, global food prices will increase by about 6% over the next 12 months. With U.S. scientists predicting that a strong El Ni?o could raise temperatures by 1.5 degrees this summer and fall, food price increases are becoming a constant rather than a variable.

Rising food prices lead to lower growth rates. According to a paper from Ghent University in Belgium, a 10% increase in global food prices generally results in a 0.5% decrease in global GDP 18 months later. When inflation soars, consumers close their wallets, and companies reduce investment and employment. Monetary tightening by central banks to control prices can further accelerate economic slowdown. JP Morgan recently warned in an investor memo that "(food price increases due to abnormal temperatures) pose a challenge to steadily declining inflation." There are concerns that the heatwave could dampen hopes for a soft landing of the U.S. economy amid easing inflation.

Pakistan Lost 8.5% of GDP Due to Last Year’s Floods... Developed Countries Also Suffer Increasing Damage

Abnormal climate usually causes greater damage to developing countries, which are considered the 'weak links.' Pakistan’s case, which suffered severe damage from heatwaves, heavy rains, and floods last year, is a representative example of increasing climate risks. Last year, floods in Pakistan claimed 1,700 lives and directly or indirectly affected 14% of the population. The scale of flood damage reached 8.5% of GDP. The International Monetary Fund (IMF) initially projected Pakistan’s 2023 annual economic growth rate at 4.5% early last year but drastically lowered it to -0.5% this year (based on the fiscal year ending June 2023). While unstable economic policies and inflation caused by the Ukraine war also had an impact, the climate disaster highlighted how severely developing economies are shocked, raising concerns. WSJ warned that "(climate disasters) have the greatest impact on developing countries where many people work on farms, food and energy consumption account for a large share of total budgets, and both governments and infrastructure are vulnerable."

▲Flooding occurred in the Peru region due to the influence of El Ni?o.
[Photo by EPA Yonhap]

In a report published in 2021, the IMF predicted that major climate disasters would reduce global per capita GDP by an average of 1.2 percentage points. While small and poor countries suffer greater damage due to destruction of productive capital, public infrastructure, and supply chain instability, developed countries could see increased production through reconstruction and increased relief spending. However, contrary to IMF expectations, developed countries are also facing growing economic costs due to abnormal climate. According to the U.S. National Oceanic and Atmospheric Administration (NOAA), since 2016, the U.S. has experienced more than 17 disasters each costing at least $1 billion annually. This is about three times the average of six events per year over the past 25 years. WSJ reported, "The Federal Reserve, which aims to control inflation without sacrificing the economy, faces an uncontrollable key factor: the weather," adding that "natural disasters are causing increasing damage to developed economies as well."

This content was produced with the assistance of AI translation services.