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Drought and extreme heat hit the world’s three largest economies at the same time

London (CNN Business) — Estimating how catastrophic climate change will be for the global economy has historically proven challenging. But in the summer of 2022, it’s becoming increasingly apparent how quickly the costs can add up. Extreme heat and drought conditions are hitting the United States, Europe and China, compounding problems for workers and businesses at a time when economic growth is already slowing sharply and adding to upward pressure on prices. prices.

In the Chinese province of Sichuan, all factories have been ordered to close for six days to save energy. Ships carrying coal and chemicals are struggling to make their regular trips along Germany’s Rhine River. And people living on the West Coast of the United States have been told to use less electricity as temperatures rise.

These events “have the ability to be quite significant for the particular regions that are affected,” said Ben May, director of global macroeconomic research at Oxford Economics.

The extent of the damage could depend on the duration of the heat waves and the lack of rain. But in countries like Germany, experts warn there is little relief in sight and companies are preparing for the worst.

drought extreme heat

A barge passes exposed rocks and sandbanks on the Rhine river in Bacharach, Germany, on Aug. 15. (Credit: Boris Roessler/dpa via AP)

Drought, extreme weather and economic slowdown

It’s not just the Rhine River. Around the world, the rivers that support global growth – the Yangtze, Danube and Colorado – are drying up, impeding the movement of goods, interfering with irrigation systems and making it difficult for power plants and factories stay cool.

At the same time, the scorching heat is hampering transportation networks, depleting energy supplies and hurting worker productivity.

“We shouldn’t be surprised by heat waves,” said Bob Ward, director of policy and communications at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. “They are exactly what we predicted and are part of a trend: more frequent and more intense around the world.”

China is facing its fiercest heat wave in six decades, with temperatures exceeding 40 degrees Celsius in dozens of cities. Parts of California could see temperatures as high as 42.8 degrees Celsius this week. Earlier this summer, temperatures exceeded 40°C in the UK for the first time ever.

The global economy was already under pressure. Europe is at high risk of recession as energy prices soar, fueled by the Russian invasion of Ukraine. High inflation and aggressive interest rate hikes by the Federal Reserve threaten growth in the United States. China is grappling with the fallout from harsh coronavirus lockdowns and a housing crisis.

“Right now, we are at the most difficult point of economic stabilization,” Chinese Premier Li Keqiang said this week.

drought extreme weather

In this photo you can see the dry grass area in Greenwich Park. 8 of 14 regions in England declared a drought on Friday following a prolonged heatwave with minimal rainfall this summer due to climate change. (Credit: Hesther Ng/SOPA Images/LightRocket via Getty Images)

Impact on supply chains

Extreme weather could exacerbate “existing tipping points” along supply chains, one of the main reasons inflation has been difficult to bring down, Oxford Economics’ May said.

China’s Sichuan province, where factories shut down production this week, is a hub for semiconductor and solar panel makers. Power rationing will hit factories owned by some of the world’s biggest electronics companies, including Foxconn, a supplier to Apple and Intel.

The province is also the epicenter of China’s lithium mining industry. The shutdown may increase the cost of the raw material, which is a key component in electric car batteries.

The neighboring city of Chongqing, which sits at the confluence of the Yangtze and Jialing rivers, has also ordered factories to suspend operations for a week until next Wednesday to save electricity, state media The Paper reported.

As a consequence of the climatic situation, the forecasts for the Chinese economy this year are already being lowered. Analysts at Nomura lowered their 2022 GDP growth projection to 2.8% on Thursday, well below the government’s target of 5.5%, while Goldman Sachs cut its forecast to 3%.

USA: the Colorado River dries up and this is the government’s plan 3:46

Meanwhile, the Rhine River, which is drying up in Germany, has fallen below a critical level, impeding the flow of ships. The river is a crucial conduit for chemicals and grains, as well as commodities including coal, which is in higher demand as the country races to fill storage facilities with natural gas ahead of winter. Finding alternative forms of transit is difficult given the labor shortage.

“It is only a matter of time before plants in the chemical or steel industry close down, mineral oils and building materials do not reach their destination or heavy and high-volume transport can no longer be carried out,” said Holger Lösch, deputy director of the Federation of German Industries, in a statement this week.

Low water levels along the Rhine shaved about 0.3 percentage point off Germany’s economic output in 2018, according to Carsten Brzeski, global head of macro at ING. But in that case, the water shortage was not a problem until the end of September. This time, it could reduce GDP by at least 0.5 percentage point in the second half of this year, he estimated.

Economic sentiment in Germany continued to fall in August, according to data released this week. Brzeski said the country “would need an economic miracle” to avoid slipping into a recession in the coming months.

In the western United States, an extraordinary drought is draining the nation’s largest reservoirs, forcing the federal government to implement new mandatory water shutoffs. It is also forcing farmers to destroy crops.

Nearly three-quarters of American farmers say this year’s drought is hurting their production, with significant crop and income losses, according to a survey by the American Farm Bureau Federation, an insurance company and lobbying group representing farmers. agricultural interests.

The survey was conducted in 15 states from June 8 to July 20 in regions of extreme drought from Texas to North Dakota to California, accounting for nearly half the value of the country’s agricultural output. In California, a state with bountiful fruit and nut crops, 50% of farmers said they had to remove trees and multi-year crops due to drought, which will affect future income.

Without significant investment in improving infrastructure, costs will continue to rise, noted Ward of the London School of Economics. And the impact may not be incremental.

“There are signs that these hot spells are not just getting a little more intense and more frequent over time. It’s happening in a non-gradual way, and that’s going to make it harder to adjust,” Ward said.

— Laura He, Shawn Deng, Simone McCarthy, Benjamin Brown, Aya Elamroussi, Taylor Romine and Vanessa Yurkevich contributed reporting.

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