El Niño Good Boy or Bad?

• Author: Paul Cashin, Kamiar Mohaddes, and Mehdi Raissi

El Niño Good Boy or Bad? Finance & Development, March 2016, Vol. 53, No. 1

Paul Cashin, Kamiar Mohaddes, and Mehdi Raissi

El Niño has important effects on the world’s economies—and not all of them are bad

The current El Niño (Spanish for “The Boy”)—a band of above-average ocean surface temperatures that develops every 3 to 7 years off the Pacific coast of South America and lasts about two years—is causing major climatological changes around the world. Climate experts are continuously monitoring the developments of the 2015–16 El Niño, which is one of the most severe events in the past 50 years and, notably, the largest since the 1997–98 episode that shocked global food, water, health, energy, and disaster-response systems.

But what are the macroeconomic effects of an average El Niño event? Economists are increasingly interested in the relationship between climate—temperature, precipitation, storms, and other aspects of the weather—and economic performance, including agricultural production, labor productivity, commodity prices, health, conflict, and economic growth. A thorough understanding of this relationship can help governments design appropriate institutions and macroeconomic policies.

Taking the temperatureIn a recent IMF study, we examined variations in weather-related events—with a special focus on El Niño—over time and across different regions to identify their impact on growth, inflation, energy prices, and nonfuel commodity prices, motivated by growing concern about their effects on commodity prices and national macroeconomies. These extreme weather conditions can constrain the supply of rain-driven agricultural commodities, lead to higher food prices and inflation, and may trigger social unrest in commodity-dependent countries that rely primarily on imported food.

Our research—taking into account the economic interlinkages and spillovers between countries—analyzed the macroeconomic transmission of El Niño shocks between 1979 and 2013, both on national economies and internationally, focusing on its effects on real GDP, inflation, and commodity prices.

The results indicate that El Niño has a large but highly varied economic impact across different regions. Australia, Chile, India, Indonesia, Japan, New Zealand, and South Africa face a short-lived fall in economic activity in response to a typical El Niño shock. However, in other parts of the world, an El Niño event actually improves growth, in some countries directly—for instance, in the United States—and in other countries—such as in Europe—indirectly through positive spillovers...