The probability of El Ni ñ o phenomenon occurring is nearly 70%. World Meteorological Organization: Climate change between June and August this year | Financial institutions | World Meteorological Organization

The Holy Infant is coming. Recently, some regions in multiple Southeast Asian countries have experienced high temperatures above 40 ℃, and many parts of South America have experienced floods and secondary disasters caused by heavy rainfall. Behind these frequent abnormal climate phenomena, it may indicate a return to El Ni ñ o this year.

According to the latest forecast from the World Meteorological Organization, the likelihood of an El Ni ñ o phenomenon occurring between June and August this year is close to 70%. The Climate Prediction Center of the National Oceanic and Atmospheric Administration of the United States believes that this round of El Ni ñ o will lead to record breaking temperatures. In the eyes of senior scientist Ludster at the Potsdam Institute for Climate Impact Research, this may just be the beginning, "2024 may be the hottest year on record in the world."

The El Ni ñ o phenomenon usually brings persistent drought to the western Pacific coast, continuous rainfall to South America and the equatorial coast, and strong storms and hurricanes to the central Pacific region... The drastic changes in weather patterns will have a significant impact on agriculture, fisheries, global commodity prices, and even the economies of various countries.

IMF: Economic impact varies by region

According to a report released by the International Monetary Fund, the El Ni ñ o event not only had an impact on the global economy that year, but also led to years of sluggish economic growth in the following years. The IMF predicts that a new round of strong El Ni ñ o impacts will be even more severe, potentially suppressing economic activity in tropical countries for up to a decade. By the next century, economic losses could reach $84 trillion due to climate change potentially exacerbating the frequency and intensity of El Ni ñ o phenomena.

The report states that there are significant differences in the economic impact of El Ni ñ o on different regions. The economic activity of major economies such as Australia, Chile, India, Indonesia, Japan, New Zealand, and South Africa will all experience a brief decline due to climate shocks.

In Australia, the El Ni ñ o phenomenon leads to hot and dry summers in the southeast, increasing the frequency and severity of forest fires, which will affect wheat exports and drive up global wheat prices. The intensity of droughts and floods in New Zealand will also increase, thereby reducing local agricultural and livestock production. Chilean winter is expected to experience thunderstorms, disrupting the production of copper mines in mountainous areas and hitting the global metal supply chain. South Africa's summer will become hot and dry, affecting its agriculture and electricity production. Japan will be hit by more frequent typhoons, which may curb consumer spending. Indonesia's precipitation will be lower than in previous years, which may push up futures prices for coffee, cocoa, and palm oil. As the world's largest exporter of nickel, the country's raw material extraction and export will also be affected due to low rainfall.

The impact of El Ni ñ o on major economies

For some regions, El Ni ñ o is not a bad thing. For example, California in the United States will experience wetter weather, which is conducive to the growth of crops such as almonds and avocados. Winters in the Northeast will be warmer, while tornado activity in the Midwest will decrease, all of which will bring higher economic output. Canadian fisheries will benefit from rising temperatures. For Mexico, the number of hurricanes hitting the coast will significantly decrease, which is beneficial for offshore oil extraction and promotes exports.

Europe will also be the beneficiary, and the IMF believes that the region will benefit from the trade spillover effects caused by climate change.

A journalist from First Financial News found that weather related events have pushed up the prices of some agricultural products since the beginning of this year. Sugar and cocoa futures have risen by more than 20%, while wheat and livestock prices such as pigs and cows have also risen significantly due to the impact of feed prices. The prices of beef products in the United States have risen by over 30%. Wheat and soybean prices have risen significantly in the past month.

Multiple agricultural product prices have seen a significant increase this month

In the UK, food inflation has become the main driver of high prices, with the UK Consumer Price Index rising 8.7% year-on-year in May, reaching its highest level since the 1990s. The Bank of Indonesia stated last month that it is expected that the El Ni ñ o phenomenon will affect food inflation in the country in the second half of the year. The Bank of India's governor, Darius, also warned against the impact of the El Ni ñ o phenomenon on the Indian economy.

Deutsche Bank believes that the main impact of the El Ni ñ o phenomenon may be the rise in food prices, making import dependent emerging market countries more vulnerable, and the poor inflation prospects of developed market economies even worse. "Looking back at history, the strong El Ni ñ o phenomenon from 1972 to 1973 occurred simultaneously with the oil shock at the end of 1973, leading to a surge in energy and food prices. The risk now is that a series of seemingly short-term inflation shocks may combine to lead to more persistent and deeply rooted inflation."

Countries actively respond to climate risks

The Paris Agreement promises to limit global warming to 2 degrees Celsius compared to pre industrial temperatures. Scientists believe that a temperature increase of 1.5 degrees Celsius is a critical critical point, beyond which the likelihood of extreme floods, droughts, and food shortages may sharply increase.

Major central banks are also closely monitoring the impact of climate change on the economy and are vigilant. Researchers analyze the relationship between changes in various factors, including agricultural production, labor productivity, commodity prices, and economic growth, in order to find appropriate policy responses.

In the China Financial Stability Report, the People's Bank of China proposed to study the impact of climate change on financial stability, explore the systematic consideration of climate change factors in stress testing of financial institutions, and gradually incorporate climate change related risks into the macro prudential policy framework, encouraging financial institutions to assess and manage their environmental and climate risks.

Last July, the European Central Bank announced more measures to incorporate climate change factors into the euro monetary policy framework to reduce financial risks related to climate change and support the green transformation of the economy. The European Central Bank has stated that in order to implement the goals of the Paris Agreement and EU related climate goals, it will introduce climate change factors in corporate bond purchases, collateral frameworks, disclosure requirements, and risk management, aiming to reduce financial risks related to climate change on assets and liabilities, help maintain price stability in the Eurosystem, and support green economic transformation.

By contrast, climate change has not yet been included in the key considerations of the Federal Reserve's monetary policy. The Federal Reserve stated in its 2021 Climate Change and Financial Stability Report that its financial stability monitoring framework is flexible enough to broadly incorporate many key factors of climate related risks. More research and analysis are needed to fully incorporate these risks into financial stability monitoring, including significant improvements in data and models. In January of this year, Federal Reserve Chairman Powell stated that the Federal Reserve's regulatory powers have enabled it to play a role in ensuring that financial institutions "manage" climate change risks appropriately. During last week's monetary policy hearing, Powell stated that climate change is not related to current monetary policy.