"Abnormal Climate, Growing Economic Impact... Raising Prices and Lowering Growth Rates"

Bank of Korea 'Impact of Abnormal Climate on the Real Economy'
Abnormal Climate Raises Fruit Prices by 0.4%P
Agriculture, Forestry, Fisheries, and Construction Growth Rates Decrease by up to 1.1%P and 0.4%P

A recent study has found that the impact and persistence of abnormal climate phenomena on the economy have increased. Abnormal climate shocks not only affect fruit and food prices but also reduce the growth rates of agriculture, forestry, and fisheries, and construction industries by up to 1.1 percentage points and 0.4 percentage points, respectively.

'Heat wave advisory will be in effect in the Seoul area from 11 a.m.'

With a loud alert sound, a safety notification text arrived on the mobile phone. This is not the typical midsummer situation of late July to early August. It is a heat wave advisory issued in mid-June. Due to global warming, the whole world is suffering from abnormal weather. The four distinct seasons in South Korea are now a thing of the past. Photo by Kang Jin-hyung aymsdream@

According to the 'BOK Issue Note: The Impact of Abnormal Climate on the Real Economy' released by the Bank of Korea on the 19th, using the Climate Risk Index (CRI) to estimate the impact of abnormal climate on prices through the Phillips curve, it was found that since 2010, the influence of abnormal climate on the overall Consumer Price Index (CPI) is 0.04 percentage points. In particular, abnormal climate was analyzed to affect fruit prices by 0.40 percentage points and food prices by 0.18 percentage points.

The CRI is an abnormal climate indicator developed by the Bank of Korea to understand the impact of abnormal climate on the economy. It was created by referencing the methodology of the Actuaries Climate Index (ACI), a monthly index developed by the Society of Actuaries in the United States and Canada using abnormal climate and sea level data from those countries. The CRI calculates five factors?abnormal high temperature, abnormal low temperature, precipitation, drought, and sea level height?for 16 provinces and cities, then averages the standardized values compared to the base period (1980?2000).

Analysis shows that the impact of abnormal climate on the economy is increasing. According to the local projection method model, while abnormal climate changes did not significantly affect industrial production in the past, since 2001, abnormal climate shocks have lowered the industrial production growth rate by about 0.6 percentage points 12 months later.

Although the influence of the climate crisis has relatively decreased, its persistence has lengthened. The peak size of the shock response in the recent period (2001?2023) was 0.03 percentage points, lower than the base period (0.08 percentage points), but its duration was about two months, showing a longer persistence. The report analyzed that this is because the increased imports through FTAs and other means have enhanced substitution effects related to agricultural, livestock, and fishery products, resulting in a relatively lower impact of abnormal climate changes on prices.

From a growth perspective, abnormal climate has a significant negative impact on agriculture, forestry, fisheries, and construction industries. Bayesian VAR analysis showed that abnormal climate shocks reduce the growth rate of agriculture, forestry, and fisheries by up to 1.1 percentage points and construction by up to 0.4 percentage points. In contrast, the impact on manufacturing and service industries was relatively small. Since 2023, abnormal climate shocks have contributed about 10% to CPI inflation.

Meanwhile, the nationwide and regional CRI in South Korea has shown a trend of increasing over time, with regional disparities widening. Gangwon and Jeju significantly exceeded the national CRI level, with abnormal high temperatures being a major cause in Gangwon and sea level height in Jeju.

Jung Won-seok, head of the Planning and Research Team at the Bank of Korea’s Jeonbuk Regional Headquarters and author of the report, explained, "The impact and persistence of abnormal climate phenomena on the economy have recently been observed to increase. Although abnormal climate did not significantly affect industrial production in the past, since 2001, the negative impact has been larger and more persistent compared to before."

He added, "The influence of abnormal climate phenomena on inflation has been statistically significant across most items since 2010, especially with a large impact on food and fruit prices. Since mid-2023, the impact of abnormal climate on prices has been expanding. By industry, agriculture, forestry, fisheries, and construction growth have been notably negatively affected."

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