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Speaker 1: June just rains and never stops thirty days and spoils

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Speaker 1: the crops. Hello Stephanomics, here the podcast that brings you

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Speaker 1: the global economy, and if you'll forgive the indulgence, a

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Speaker 1: bit of Flanders and Swan. That was from the Song

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Speaker 1: of the Weather, written back in the nineteen fifties by

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Speaker 1: my father Michael Flanders and his partner Donald Swan. We

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Speaker 1: Brits were famous for talking about the weather long before

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Speaker 1: it was fashionable. But now everyone's doing it and it's

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Speaker 1: no joke. Climate change is an inescapable part of our

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Speaker 1: daily lives, with a growing impact on the economy and

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Speaker 1: policy in most of the world. Increasingly extreme weather gets

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Speaker 1: top billing on the nightly news. We're also becoming better

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Speaker 1: informed about weather phenomena such as El Nino. So as

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Speaker 1: you probably already know, al Nino is a period of

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Speaker 1: warmer temperatures in the eastern part of the Pacific around

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Speaker 1: the Equator, which can have knock on effects for the

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Speaker 1: weather and much else in many different parts of the world.

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Speaker 1: Recent Alninio's have seemed to become more intense, and the

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Speaker 1: US Climate Protection Center has said there is a more

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Speaker 1: than ninety percent chance of one unfolding later this year

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Speaker 1: for the first time in four years. If basic crops

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Speaker 1: are affected in poorer economies and food prices go up

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Speaker 1: as they have in the past, that would be bad news. Indeed,

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Speaker 1: after everything the global economy has been through in the

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Speaker 1: past few years. In a few minutes, I'll hear more

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Speaker 1: about what we might have to expect from a strategist

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Speaker 1: at Deutsche Bank who's looked at the historical record. I'll

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Speaker 1: also talk to a global economist from Bloomberg Economics who's

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Speaker 1: made a stab at estimating exactly how prices and growth

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Speaker 1: could be affected in different parts of the world. But first,

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Speaker 1: here's Bloomberg's LAWA Curtis with related news from that crucial

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Speaker 1: artery of global trade, the Panama Canal.

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Speaker 2: Water levels in Panama's Gatoon Lake are falling fast and

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Speaker 2: are projected to hit historic clothes by the end of July.

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Speaker 2: Making matters worse, an al Nino system is forming, which

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Speaker 2: typically makes the region hotter and drier than usual, and

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Speaker 2: the water shortages could stretch into twenty twenty four. But wait,

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Speaker 2: this is a podcast about economics, so why are we

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Speaker 2: talking about a drought in Central America? Well, remember just

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Speaker 2: a few short years ago, when we were all waiting

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Speaker 2: out the pandemic. Stuck in our houses as we waited

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Speaker 2: months for the new sofas and grills and other consumer

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Speaker 2: goods to arrive, all that stuff was stuck on ships

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Speaker 2: and in containers as a supply chain seized under pandemic

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Speaker 2: pressure and consumer demand. We know now that the crunch

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Speaker 2: caused shortages and delays that caused a huge spike in

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Speaker 2: shipping costs and eventually helped spur the inflation rate to

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Speaker 2: a four decade high, which the Federal Reserve has only

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Speaker 2: just started to get under control.

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Speaker 3: The Panamacanal is one of the essential what we call

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Speaker 3: maritime chokepoints, because this basically cuts massive sailing distances very

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Speaker 3: short when you can transit the Panama Canal. The Seuiz

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Speaker 3: Canal is another one. Turkish straits a third one.

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Speaker 2: That's Peter Sand, chief analyst at freight data company Zanita.

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Speaker 3: It involves all kinds of supply chains of energy and commodities,

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Speaker 3: and naturally also for containers shipping. It's a vital artery

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Speaker 3: for containers traveling from far Eastern manufacturers into the US

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Speaker 3: East Coast if they do not go via the Zeus.

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Speaker 2: Canal, Cattuned Lake feeds the Panama Canal with fresh water

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Speaker 2: to lift huge container ships eighty five feet above sea

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Speaker 2: level and through twelve locks from the Pacific Ocean to

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Speaker 2: the Caribbean. To manage low water levels, the canal has

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Speaker 2: started to impose surcharges and draft limits, or how low

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Speaker 2: the vessels can sit in the water, and that means

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Speaker 2: they can carry less stuff.

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Speaker 4: We have a really very volatile supply chain infrastructure.

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Speaker 2: Stephanie Loomis is head of Ocean product for the Americas

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Speaker 2: at Germany based Rina's Logistics. They're a freight forwarder, or,

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Speaker 2: as she describes it, a travel agent for cargo. She's

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Speaker 2: not too concerned about the drought just yet. There's just

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Speaker 2: so much more capacity available on ocean liners compared to

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Speaker 2: this time last year, and shipping rates are low for now.

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Speaker 2: But there are other things worth watching that could compound

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Speaker 2: the risk to supply chains.

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Speaker 4: It doesn't take much to knock it off center and

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Speaker 4: right now we've got several pretty major things brewing that

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Speaker 4: if they should all come to the surface at the

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Speaker 4: same time, we could be in deep trouble again.

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Speaker 2: For those of you listening in Europe, some of this

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Speaker 2: may sound familiar. The Rhine River, which stretches hundreds of

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Speaker 2: miles from the Alps to the North Sea, is all

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Speaker 2: already seeing water levels low enough this season to restrict trade,

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Speaker 2: and fuel shipping costs have skyrocketed. The river is used

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Speaker 2: to transport millions of tons of oil products and other

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Speaker 2: vital commodities across Europe. Last year it got so low

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Speaker 2: that trade was severely disrupted, affecting oil refining, power generation,

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Speaker 2: and more. The supply chain world led out a collective

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Speaker 2: sigh of relief last week when US West Coast dock

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Speaker 2: workers and their employers reached a tentative contract agreement after

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Speaker 2: more than a year of talks, but the deal is

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Speaker 2: still subject to approval by the union's local chapters.

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Speaker 1: It took a two week wave.

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Speaker 2: Of labor disruptions to ultimately get the White House involved,

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Speaker 2: and those port slowdowns had a knock on effect. At

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Speaker 2: the Panama Canal.

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Speaker 3: On first June, there was no waiting time whatsoever around

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Speaker 3: the new Panamax looks going northbound as from from Asia

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Speaker 3: to the US East Coast bound. But what we have

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Speaker 3: right now in the middle of June, we have five

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Speaker 3: to six days of waiting.

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Speaker 2: As draft restrictions continue to tighten through the summer, will

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Speaker 2: likely see more congestion and higher fees. For now, the

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Speaker 2: canal limits are manageable for most shippers, especially the largest

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Speaker 2: US retailers bringing in backpacks and kids shoes ahead of

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Speaker 2: the back to school season. The businesses moving around heavier

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Speaker 2: stuff like building materials and machinery could already be feeling

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Speaker 2: the pinch.

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Speaker 4: So you could see tile and granite and marble. If

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Speaker 4: the freight costs, I mean, if you have to split

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Speaker 4: that container, you have to split that shipment into two containers,

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Speaker 4: you're essentially doubling your freight costs just like that. So

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Speaker 4: this could impact some of these commodities costs to the consumer.

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Speaker 2: Costly isn't a word that inflation hawks at the Federal

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Speaker 2: Reserve want to hear. Even as the fight against in

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Speaker 2: flat has been helped by falling shipping prices, price pressures

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Speaker 2: are still proving to be stickier than many had hoped,

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Speaker 2: running at about double the Central Bank's target of two percent.

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Speaker 2: Georgetown economics professor and former IMF official Jonathan Austry says

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Speaker 2: policymakers should keep an eye on the supply chain.

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Speaker 5: First up, What we discovered was that the impact of

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Speaker 5: rising shipping costs are much more persistent than the impact

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Speaker 5: of rising energy and food prices, which is what we're

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Speaker 5: grabbing the headlines in late twenty twenty one. In the

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Speaker 5: second half of twenty.

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Speaker 2: Twenty one, Austria and his colleagues found that the twenty

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Speaker 2: twenty one bottlenecks, which caused a six hundred percent spike

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Speaker 2: in the cost of shipping containers over the ocean from

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Speaker 2: pre COVID levels, increased consumer price inflation globally by more

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Speaker 2: than two percentage points in twenty twenty two, and for

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Speaker 2: remote small island nations in the Pacific and Caribbean that

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Speaker 2: rely heavily on imported goods, it added nearly another five

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Speaker 2: percentage points.

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Speaker 5: Shipping costs are a canary in the coal mine. They

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Speaker 5: do tell us about future inflation.

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Speaker 2: Ostre says, even with low base prices, a shipping cost

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Speaker 2: increase of twenty percent boost the inflation rate yo point

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Speaker 2: one to five percentage point a year later.

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Speaker 5: I think the warning is here. If the drought and

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Speaker 5: El Nino converge to cause shipping costs to again spike.

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Speaker 5: In the second half of twenty twenty three, that should

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Speaker 5: be in top of mind for FED policy makers, because

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Speaker 5: again what we would expect is that that would be

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Speaker 5: a contributing factor that weighs against the fed's disinflation effort.

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Speaker 2: Sand and Loomis say if this drought had hit the

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Speaker 2: canal last year, when the pandemic cargo surge was in

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Speaker 2: full swing, it would have been a complete disaster. But

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Speaker 2: with cargo volumes back closer to twenty nineteen levels, there's

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Speaker 2: enough slack in global trade lanes to ensure presents are

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Speaker 2: on store shelves in time for the holidays. But water

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Speaker 2: levels in panama are still projected to hit record lows

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Speaker 2: by July, and for businesses that just realign their supply

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Speaker 2: chains to be closer to consumers on the East Coast

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Speaker 2: or to distribution centers on the Gulf Coast, rerouting all

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Speaker 2: that stuff back through California Port could be an expensive headache.

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Speaker 3: I'm not calling doom and gloom here, but I think

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Speaker 3: we need to look further ahead also into twenty four

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Speaker 3: because that's when the next dry season is about to

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Speaker 3: see in Panamaica. Now and if we do not see

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Speaker 3: the watershed filled up during the second half of this year,

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Speaker 3: going into an ear year that is likely to bring

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Speaker 3: around a longer low, say drought season or dry season

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Speaker 3: than a normal year. We could end up with even

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Speaker 3: lower water levels in twenty twenty four. So this may

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Speaker 3: be the starter for full dinner ser next year.

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Speaker 2: For Bloomberg News. I'm Laura Curtis in Los Angeles.

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Speaker 1: Now you heard there that the Federal Reserve and other

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Speaker 1: central banks might have reason to worry if Al Nino

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Speaker 1: in the second half of this year ends up raising

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Speaker 1: shipping costs. So what are the chances of that happening,

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Speaker 1: and more broadly, how bad could those impacts be. Well,

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Speaker 1: I can talk to two people now who've spent some

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Speaker 1: time looking at this from the economic standpoint, Henry Allen,

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Speaker 1: Macro's strategist at Deutsche Bank in London, and our own

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Speaker 1: Barga vi Shaq Develle from Bloomberg Economics, a global economist.

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Speaker 1: Welcome to both of you. Henry, since you're our guest,

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Speaker 1: why don't you give us some context for thinking about this.

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Speaker 1: How often have we seen El Nino have a significant

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Speaker 1: impact on the economy in the last sort of generation

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Speaker 1: or so.

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Speaker 6: So the El Nino is a warming of the sea

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Speaker 6: surface temperatures, in the Pacific, and that might sound kind

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Speaker 6: of quite benign on one level, but the problem is

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Speaker 6: that that causes the jet stream to move south, and

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Speaker 6: that in turn is correlated with a higher frequency of

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Speaker 6: natural disasters. Now, normally this is a regular cyclical pattern

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Speaker 6: that happens around every two to seven years on average.

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Speaker 6: But what's really generating concerned this time are predictions from

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Speaker 6: a number of climate agencies that this particular episode is

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Speaker 6: going to be a strong one. So for instance, we

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Speaker 6: last saw an El NINU in twenty eighteen nineteen, but

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Speaker 6: that was quite a weak one. But this, at least

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Speaker 6: according to the US Climate Prediction Center, could be for

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Speaker 6: just the third time in the twenty first century, a

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Speaker 6: strong EL NINU, and they're saying they think there's a

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Speaker 6: fifty six percent chance that it will hit that strong

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Speaker 6: threshold deeper into this year, around December January time.

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Speaker 1: I think that the most recent sort of serious time

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Speaker 1: in your piece you discussed was sort of between twenty

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Speaker 1: fourteen and twenty sixteen. So what kind of impacts do

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Speaker 1: we see there?

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Speaker 6: So there were several Firstly, you had actually in twenty

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Speaker 6: sixteen in particular, the biggest upward temperature anomaly on record

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Speaker 6: at the time, that was the highest EPP temperature that

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Speaker 6: the world had seen. You saw a higher frequency of

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Speaker 6: hurricanes in the Pacific. In both twenty fourteen and twenty fifteen,

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Speaker 6: that Pacific hurricane season had sixteen hurricanes, the joint highest

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Speaker 6: number on record. Further afield, in Africa, you had the

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Speaker 6: worst drought in decades in Ethiopia, a great deal of famine,

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Speaker 6: and one study even found that because it created conditions

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Speaker 6: that were beneficial for mosquito borne transmission, it even contributed

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Speaker 6: to the spread of the Zeka virus. So a number

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Speaker 6: of quite nasty effects for coming together there.

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Speaker 1: That's one of the things that comes through in every

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Speaker 1: bit of research that I look at is that the

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Speaker 1: sheer range of impacts and the sort of unexpected consequences.

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Speaker 1: And in another one that people are talking about currently

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Speaker 1: is the very very high temperatures in South Asia that

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Speaker 1: are potentially related to this kind of environment are pushing

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Speaker 1: countries to be even more dependent on Russian energy, just

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Speaker 1: at a time when we might have been wanting them

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Speaker 1: to follow the US led sanctions. I guess the most

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Speaker 1: significant time before twenty fourteen you mentioned was ninety seven

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Speaker 1: ninety eight, so what happened.

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Speaker 6: Then, so a bit like with the most recent one,

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Speaker 6: the most reason very strong one in twenty fourteen to sixteen.

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Speaker 6: You also had what was at the time again a

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Speaker 6: global record temperature year in nineteen ninety eight, the warmest

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Speaker 6: to date so far. For instance, there were massive rainfalls

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Speaker 6: in California, San Francisco, so it's wettest rainfall season in

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Speaker 6: over a century. You had major droughts in Indonesia, and

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Speaker 6: similarly you actually saw quite a bit of disease as well.

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Speaker 6: For instance, after major flooding in East Africa, you had

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Speaker 6: an outbreak of rift valley fever in several countries, including Kenya.

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Speaker 1: And we're talking about it this year. As you mentioned,

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Speaker 1: the US Climate Center has put the probability of an

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Speaker 1: al Nino pattern unfolding at more than ninety percent, but

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Speaker 1: as you said, it's a question at how severe it

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Speaker 1: is likely to be. You're a strategist looking at market

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Speaker 1: impacts as well as the economy. Are we already seeing

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Speaker 1: signs of potential impacts in the markets or people anticipating

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Speaker 1: impacts from El Ninia?

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Speaker 6: Definitely, I mean the most obvious impact has been among

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Speaker 6: certain agricultural commodities, so One example is coffee futures have

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Speaker 6: recently hit their highest level since one particular contract began

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Speaker 6: in two thousand and eight. You've got sugar prices that

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Speaker 6: are already around their highest level in around a decade,

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Speaker 6: and coco is at a seven year high as well.

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Speaker 6: And that's consistent with what we've seen around previous Elmineo cycles,

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Speaker 6: whereby in particular agricultural commodities see a big upward shock

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Speaker 6: and that puts upward pressure on inflation intern and.

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Speaker 1: It is I mean when you say those things, of course,

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Speaker 1: that's people worrying about their coffee, chocolate. We'd certainly have

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Speaker 1: concerns about rice prices, barga vie. I mean, there's the

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Speaker 1: sheer range of impacts that we've talked about so far,

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Speaker 1: whether it's flooding in East Africa or hurricanes in the Pacific,

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Speaker 1: the spread of the Zeka virus in past times. Coming

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Speaker 1: on top of the last twelve months where of course

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Speaker 1: we also had the impact on food prices of Russia's

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Speaker 1: invasion on Ukraine. How should we think about the potential

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Speaker 1: impact of El Nino this year, on top of all

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Speaker 1: those previous things that have happened in the global economy.

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Speaker 7: It has been pretty worrying because the only unit, as

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Speaker 7: Henry already mentioned, is going to definitely cause inflationary pressures everywhere.

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Speaker 7: We did like a very simple modeling exercise where we

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Speaker 7: looked at a few countries eleven countries, including the euro area,

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Speaker 7: and tried to understand how this atmospheric pressure that is

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Speaker 7: cost when the minor event occurs, could affect these countries.

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Speaker 7: And what we found was that almost certainly irrespective of

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Speaker 7: which part of the country, which part of the continent

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Speaker 7: the country belongs to, there would be inflationary pressures, whereas

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Speaker 7: it would definitely be much higher among countries that are

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Speaker 7: in the tropics and the southern hemisphere specifically because these

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Speaker 7: are the countries that I deal primarily with primary sector

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Speaker 7: so agricultural commodity exports, So we would expect that there

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Speaker 7: to be high inflation and lower growth.

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Speaker 1: And just to put just to put some numbers on this,

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Speaker 1: I mean, obviously there's a lot of uncertainty, but at

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Speaker 1: the global level, are we going to notice this the

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Speaker 1: impact on inflation or so, and certainly on commodity prices.

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Speaker 1: What kind of numbers would we potentially talk about.

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Speaker 7: Well, I think certain countries would definitely see high increases

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Speaker 7: to Argentina, Brazil, India, Philippines, all these countries would definitely

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Speaker 7: see higher inflation on a more global scale, depending on

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Speaker 7: how severe the only NEA turns out to be, I

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Speaker 7: think it could be even larger some of these effects. So,

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Speaker 7: for example, in Argentina and Brussel, we expect about a

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Speaker 7: zero point five percentage point higher inflation at an animal level,

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Speaker 7: and depending on how severe and how long the El

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Speaker 7: Nino event actually exists, it could be much much greater.

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Speaker 7: And given that there are significant spillover effects both from

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Speaker 7: trade and financial linkages, this could easily seep through even

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Speaker 7: to like developed countries or countries that are not directly

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Speaker 7: impacted by these weather phenomena.

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Speaker 1: And I mean, Henry, I guess the various numbers. I

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Speaker 1: think the sort of we could potentially be adding nearly

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Speaker 1: four percentage points to non energy commodity prices. Obviously much

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Speaker 1: that's going to have to translate into a much smaller

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Speaker 1: impact on global inflation. But as Bargavi said, it varies

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Speaker 1: a lot country by country. Does that sort of broadly

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Speaker 1: tally with what you've been thinking at Deutsche BAC.

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Speaker 6: Yes, absolutely, I mean One of the things that makes

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Speaker 6: this El Nino phenomenon so hard to predict is that

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Speaker 6: the effects are so variable. So there are parts of

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Speaker 6: the world, for instance, like the southern United States, where

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Speaker 6: it makes flooding a lot more likely. But there are

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Speaker 6: other parts of the world, toicularly the other side of

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Speaker 6: the Pacific, like Indonesian and Australia, where it makes drought

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Speaker 6: more likely. So it's very hard to kind of find

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Speaker 6: a single aggregate global effect that it has because that

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Speaker 6: impact is so variable according to different regions, and.

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Speaker 1: I noticed them. And of course when you think about

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Speaker 1: possible places that where it's beneficial to have, for example,

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Speaker 1: more rain. I mean, you know, if you're an avocado

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Speaker 1: or an almond almond grower in California, it's actually quite

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Speaker 1: good news to have more rain. But it's striking when

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Speaker 1: you go through the list the iniquity of how the

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Speaker 1: pain gets distributed Barga Vie. I mean, this is by

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Speaker 1: and large going to be a much more negative impact

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Speaker 1: and certainly have a bigger impact on inflation in the

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Speaker 1: poorer parts of the world.

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Speaker 7: And we look at things like how it affects economic growth.

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Speaker 7: We found that Indian and Argentina about zero point five

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Speaker 7: percentage points and that GDP got knocked off, but the

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Speaker 7: effect is going to be much larger for Argentina than

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Speaker 7: a country like India, which has extremely high GDP growth

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Speaker 7: in general, So even if they're equally impacted, I think

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Speaker 7: the smaller, poorer countries whose primary sources of revenue are

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Speaker 7: like output generation, is due to these commodity experts.

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Speaker 1: And I was struck that we had some even more

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Speaker 1: extreme estimates by some Earth scientists at Dartmouth College in

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Speaker 1: the US, Christopher Callahan and Justin Mankin, who estimated that

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Speaker 1: what Henry was talking about in the late nineties that

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Speaker 1: El Nina had led to nearly six trillion dollars in

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Speaker 1: lost GDP, So that's about a hundred times more than

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Speaker 1: the previously thought. And their point was that economists are

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Speaker 1: sort of only measuring what we could see got damaged,

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Speaker 1: or we could see that the slowdown in growth that

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Speaker 1: was very clear and apparent at that time, and we're

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Speaker 1: not recognizing that the sort of variability in the weather

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Speaker 1: can hurt economic growth in a prolonged way. So you

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Speaker 1: get persistent shortfalls in output that only unfold over several years,

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Speaker 1: and as a result of taking those into account. They

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Speaker 1: think you could see a cumulative shortfall in GDP over

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Speaker 1: the next century of maybe eighty trillion dollars or about

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Speaker 1: one percent of global GDP, just because of El Nino. Bargave.

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Speaker 1: You and I were sort of joking that these were

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Speaker 1: just madly big numbers earlier. But do you accept that

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Speaker 1: we are potentially only looking at the tip of the

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Speaker 1: iceberg when we do these straightforward analyses of the impact

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Speaker 1: on food prices or growth.

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Speaker 7: Yeah, definitely for starters. We haven't even started thinking about

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Speaker 7: other kinds of still over effects of direct effects on

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Speaker 7: these natural as asters bring about them if depending on

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Speaker 7: the severity of the ol ninio, so there definitely could

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Speaker 7: be other reasons that create negative impacts on commodities and

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Speaker 7: therefore causing inflation. But again, like we joked about earlier,

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Speaker 7: I don't necessarily know if it's going to be that large,

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Speaker 7: but for sure, our simple analysis only looks at the

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Speaker 7: direct effects, and there could be a lot more beneath

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Speaker 7: the iceberg.

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Speaker 6: Henry, Yeah, I think that's absolutely correct. I mean, one

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Speaker 6: thing that I was quite surprised about reading about the

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Speaker 6: old linear phenomenon was that it didn't just seem to

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Speaker 6: have an impact on food commodities. It was also energy commodities.

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Speaker 6: There seemed to be a positive correlation too. There was

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Speaker 6: one paper, for instance, by the IMF a few years

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Speaker 6: back that found that there was a statistical effect on

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Speaker 6: energy and oil prices. For instance, if you have droughts

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Speaker 6: that means you get less electricity from hydroelectric dams, you

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Speaker 6: need to find that from other sources. Another thing is

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Speaker 6: that farmers in trout areas need more water for irrigating

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Speaker 6: their crops. So actually the spillover effects don't just stick

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Speaker 6: with food, but they can spread to other categories the

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Speaker 6: inflation baskets.

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Speaker 1: Well, and I guess, as you mentioned at the starts,

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Speaker 1: is it's technically a warmer phase for the eastern Equatorial Pacific.

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Speaker 1: You know, in many ways it is a sneak preview

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Speaker 1: of what we might see with climate change as we go.

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Speaker 1: As we go forward, and as we get better at

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Speaker 1: measuring the impact of climate change, I guess we get

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Speaker 1: a bit better at measuring the impact of al ninia.

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Speaker 1: Henry Allen and Barga Vi Satjevelle, thank you very much.

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Speaker 6: Thank you.

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Speaker 1: Well, that's it for this episode of Stephanomics. Next week

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Speaker 1: we'll have more. In the meantime, you can get a

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Speaker 1: lot more economic insight and news from the Bloomberg Terminal

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Speaker 1: website or app. And for those of you wondering what

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Speaker 1: the weather's like the rest of the year in.

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Speaker 6: July and Sunny's hot is in shiny now it's not.

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Speaker 4: Of col and dank and wait.

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Speaker 1: This episode was produced by Magnus Henrickson, Yang Yang and

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Speaker 1: Summer Sadie, with help from Oscar Boyd. Special thanks to

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Speaker 1: Laura Curtis, Henry Allen, Barga, v Shaq Develle, and Michael

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Speaker 1: Flanders and Donald Swamp. The executive producer of Stephanomics is

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Speaker 1: Molly Smith, and the head of Bloomberg Podcast is Sage Bone.

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Speaker 4: Bloody.

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Speaker 6: Januinely again, I hope that's been helpful for those of

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Speaker 6: you are planning your holidays