The increased likelihood of the El Niño weather pattern could see emerging markets – including South Africa – face stagflationary risks and higher food prices as soon as this year.
This is according to Schroders senior emerging markets economist David Rees, who defined El Niño as a periodic weather pattern typically observed every two to seven years, where a warming of sea waters in the Pacific Ocean disrupts the climate.
El Niño can disrupt weather patterns and, therefore, significantly impact food prices.
Rees said El Niño could lead to drier conditions in some areas of Latin America, Australia, India, and Southern Africa while bringing heavier rainfall to other regions. In both circumstances, food prices could be affected in several ways.
Firstly, low rainfall can cause the water levels of the Panama Canal to fall, resulting in ships carrying lighter loads to avoid grounding. This logistical challenge may cause inflationary pressures and disturb supply chains.
El Niño is also expected to impact the supply side of the global commodities market.
“There are already reports of heavy rain disrupting copper mining in Chile. However, in Asia, drier weather and shorter monsoon seasons can be positive for the extraction of other metals and ores such as bauxite, nickel and tin,” he said.
“South Africa is already experiencing some extreme weather conditions, and the onset of El Niño is likely to exacerbate these issues in the months ahead, with higher winter rainfall giving way to a hotter and drier summer.”
This shift in weather conditions is also likely to affect the local and global supply of food, which could push prices significantly higher.
“While leading indicators imply that food inflation in South Africa should still fall significantly in the near term, the effects of El Niño could cause it to rebound in 2024, leaving the South African Reserve Bank with less room to lower interest rates.”
According to Rees, while the relationship between El Niño and global food prices is multifaceted, a stronger El Niño event could potentially lead to a significant increase in food prices, especially if energy prices remain stable.
This scenario could push average emerging market food inflation into double digits during 2024, limiting central banks’ ability to lower interest rates and fueling stagflationary risks.
Rees said the impact of El Niño will be felt unevenly across different economies.
“Higher food prices and shortages of goods can have a devastating impact on poorer emerging markets and even trigger social unrest,” he said.
“Meanwhile, those EM economies that are major net exporters of food can suffer from a loss of export revenues if production losses are worse than any price increases.”