Extreme heat hits the world’s three largest economies simultaneously

Extreme heat hits the world’s three largest economies simultaneously

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 closed for six days to save electricity. Ships transporting coal and chemicals struggle to make their usual trips on the German Rhine. And people on America’s West Coast have been urged to use less electricity as temperatures rise.

These events “can be quite significant for the regions affected,” said Ben May, director of global macro research at Oxford Economics.

The extent of the pain could depend on how long the heat waves and lack of rain last. But in countries like Germany, experts are warning there is no improvement in sight and companies are preparing for the worst.

Extreme weather and an economic slowdown

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

At the same time, searing heat is hampering transport networks, straining electricity supplies and hampering worker productivity.

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

China is facing its worst heatwave in six decades, with temperatures exceeding 40 degrees Celsius (104 degrees Fahrenheit) in dozens of cities. Parts of California could experience temperatures as high as 109 degrees Fahrenheit this week. Earlier this summer, temperatures in the UK topped 40 degrees Celsius for the first time ever.Dry grass is seen in Greenwich Park, England.  Sixty-three percent of land in the European Union and the United Kingdom - an area almost the size of India - is now affected by either drought warnings or warnings.

The global economy was already under pressure. Europe faces a high risk of recession as energy prices soar due to the Russian invasion of Ukraine. High inflation and aggressive rate hikes by the US Federal Reserve are threatening growth in the United States. China is struggling with the consequences of the tough corona lockdowns and a real estate crisis.

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

Something else to worry about

Extreme weather could exacerbate “existing bottlenecks” along supply chains, a key reason inflation has been difficult to contain, 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 belonging to some of the world’s largest electronics companies, including Apple (AAPL) suppliers Foxconn and Intel (INTC).

The province is also the epicenter of China’s lithium mining industry. Shutdown can drive up the cost of raw material, which is a key component in electric car batteries.

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

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

The forecasts for China’s economy this year are therefore already being revised downwards. Analysts at Nomura lowered their forecast for 2022 GDP growth to 2.8% on Thursday – well below the government’s target of 5.5% – while Goldman Sachs cut its forecast to 3%.

Germany’s shrinking Rhine, meanwhile, has fallen below a critical level, impeding the flow of ships. The river is a major conduit for chemicals and grains, as well as commodities — including coal, which is in greater demand as the country scrambles to fill up natural gas storage facilities ahead of the winter. Given the labor shortage, it is difficult to find alternative forms of transit.

“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 destination or large-volume and heavy transports can no longer be carried out,” says Holger Loesch, Deputy Managing Director of the Federation of German Industries , said in a statement this week.

According to Carsten Brzeski, Global Head of Macro at ING, low water along the Rhine reduced Germany’s economic output by around 0.3 percentage points in 2018. But in this case low water was not a problem until the end of September. This time it could cut GDP by at least 0.5 percentage point in the second half of this year, he estimated.

According to data released this week, economic sentiment in Germany continued to deteriorate in August. Brzeski said the country “needs an economic miracle” to avoid falling into recession in the coming months.

A bathtub ring watermark at Hoover Dam/Lake Mead, the country's largest man-made water reservoir formed by the dam on the Colorado River.

In the American West, an extraordinary drought is draining the nation’s largest reservoirs, forcing the federal government to implement new mandatory water cuts. It also forces farmers to destroy crops.

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

The survey was conducted June 8 through July 20 in 15 states in extreme drought regions from Texas to North Dakota to California, which account for nearly half of the country’s agricultural output value. In California — a state with high fruit and nut tree harvests — 50% of farmers said they had to remove trees and perennials due to drought, which will impact future revenue.

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

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

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