Extreme heat hit three of the world’s largest economies at once

Extreme heat and drought are hitting the United States, Europe and China, exacerbating problems for workers and businesses at a time when economic growth is already slowing sharply and increasing upward pressure on prices.

In the Chinese province of Sichuan, all factories were ordered to close for six days to save energy. Ships carrying coal and chemicals are having difficulty making their regular voyages on the Rhine in Germany. And people living on America’s west coast have been asked to use less electricity because of the soaring temperatures.

These developments “could be quite significant for the specific regions affected,” said Ben May, director of global macroeconomic research at Oxford Economics.

The degree of pain may depend on how long the heat waves last and the absence of rain. But in countries like Germany, experts warn that no relief is in sight, and companies are bracing for the worst.

Extreme weather and economic downturn

It’s not just the Rhine. Around the world, the rivers that support global growth—the Yangtze, the Danube, and the Colorado—are drying up, hindering the movement of goods, disrupting irrigation systems, and making it difficult to cool power plants and factories.

At the same time, scorching heat disrupts transportation networks, overloads power supplies and reduces productivity.

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

China is facing its worst heat wave in six decades, with dozens of cities hitting over 40 degrees Celsius (104 degrees Fahrenheit). Temperatures could reach 109 degrees Fahrenheit this week in parts of California. Earlier this summer, temperatures in the United Kingdom topped 40 degrees Celsius. For the first time in history.

The global economy was already under pressure. Europe is facing a recession due to a sharp rise in energy prices caused by Russia’s invasion of Ukraine. High inflation and aggressive interest rate hikes by the Federal Reserve threaten economic growth in the United States. China is grappling with the effects of severe restrictions due to the coronavirus and the real estate crisis.

“Currently, we are in the most difficult stage of economic stabilization,” Chinese Premier Li Keqiang said. said this week.

What else to worry about

Extreme weather could exacerbate “existing problems” in supply chains, a major reason why inflation is hard to bring down, according to Oxford Economics’ May.

China’s Sichuan province, where factories were closed this week, is a hub for semiconductor and solar cell manufacturers. Electricity rationing will affect factories owned by some of the world’s largest electronics companies, including Apple (AAPL) supplier Foxconn and Intel (INTC).

The province is also the epicenter of China’s lithium mining. The shutdown could increase the cost of raw materials, which are a key component of electric vehicle batteries.

The neighboring city of Chongqing, located at the confluence of the Yangtze and Jialing rivers, also ordered factories to shut down for a week until next Wednesday to save electricity, state-run The Paper reported.

The bed of the Yangtze River is exposed due to drought on August 17 in Chongqing, China.

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

Meanwhile, the shrinking Rhine in Germany has sunk below a critical level, hampering shipping. The river is an important conduit for chemicals and grains, as well as commodities, including coal, for which demand is rising as the country seeks to fill natural gas storage before winter. Due to the lack of labor, it is difficult to find alternative modes of transport.

“It is only a matter of time before plants in the chemical or steel industry are shut down, mineral oils and building materials do not reach their destinations, and bulky and heavy transports are no longer carried out,” Holger Lösch, Deputy Director of the Federation said in a statement German industry this week.

In 2018, low water levels on the Rhine reduced Germany’s output by about 0.3 percentage points, according to Karsten Brzeski, head of global macroeconomics at ING. But in this case, low water was not a problem until the end of September. According to him, this time GDP could decline by at least 0.5 percentage points in the second half of this year.

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

Watermark in the form of a ring in the tub at the Hoover Dam/Lake Mead, the country's largest man-made reservoir, formed by a dam on the Colorado River.

In the American West, an extreme drought is depleting the nation’s largest reservoirs, forcing the federal government to impose new mandatory water restrictions. It also forces farmers to destroy crops.

Nearly three-quarters of US farmers say this year’s drought has damaged their crops, causing significant crop and income losses, according to a survey by the American Federation of Farm Bureaus, an insurance company and agricultural lobbying group.

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

Without significant investment in infrastructure upgrades, costs will only rise, notes Ward of the London School of Economics. And the impact may not be gradual.

“There are indications that these heat episodes are not just getting a little more intense and frequent over time. It doesn’t happen in a gradual manner, and it will make it difficult to adapt,” Ward said.

– Laura He, Sean Deng, Simone McCarthy, Benjamin Brown, Aya Elamrussi, Taylor Romine and Vanessa Yurkevich made a report.

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