A Perfect Storm Brewing For Our Economy? El Nino Is Coming Back
Recent research has quantified the impact El Nino has on the global economy. In some parts of the world (for example U.S.A.) it has positive effects on the economy. In other parts it reduces growth, increases food and oil prices and inflation. South Africa unfortunately falls into the second category.
Not only does it have adverse economic implications but the El Nino of 2009-2010 caused food prices to rise rapidly which was one of the catalysts that contributed to the Arab Spring in 2011.
One of the good things about El Nino is that it is usually accurately forecasted and this gives countries and businesses time to react.
Weather forecasters say El Nino has just started, so we can expect either a drought or a dry summer in 2015-2016.
What is El Nino?
It is the warm phase of the “El Nino Southern Oscillation” which causes air pressure to rise off the coast of Peru. This is counter cyclical to normal weather patterns and causes drought in certain areas and abnormally high rainfall in others. El Nino occurs irregularly (roughly every three to seven years) and the severity of its impact is also variable.
What effect does it have?
It leads to widespread fluctuations in the production of primary products (agriculture, fishing, mining and forestry). As primary products in South Africa contribute 10% to Gross Domestic Product (GDP), this results in a 0.72% drop in the country’s GDP during an El Nino episode.
The current forecast in 2015 is for 1.4% GDP growth, so this could be more than halved.
As the export of primary products is more than half of our exports, this immediately has an adverse effect on our balance of payments – less exports and increased imports of food and oil. The Rand has weakened over the past few years to near record lows, so this will exacerbate this trend. The knock on effect of this is higher inflation which usually then pushes interest rates up.
Get ready now!
The rise in food prices is especially harsh on food importing nations (such as the Middle East). Oil prices also increase as hydroelectric energy decreases resulting in more fuel demand. This could be devastating for some of our Northern neighbours such as Zimbabwe and Mozambique. Considering the recent xenophobic attacks, another influx of refugees could lead to more social unrest.
We could potentially be in for “the perfect storm” as El Nino further undermines the economic and social fabric of South Africa and its neighbours.
Those businesses that are dependent on the performance of GDP growth, the cost of primary products and imports have time to put mitigating strategies into effect before the expected 2015 El Nino.