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Extreme heat hits the world’s three largest economies simultaneously


Extreme heat and drought conditions hit the United States, Europe and China, compounding problems for workers and businesses at a time when economic growth is already slowing sharply and adding to upward pressure on prices .

In the Chinese province of Sichuan, all factories have been ordered to close for six days to save electricity. Ships carrying coal and chemicals are struggling to make their usual journeys along the German Rhine. And people on the West Coast of the United States have been urged to use less electricity as temperatures soar.

These events “have the capacity to be quite significant for the particular regions that are affected,” said Ben May, director of global macroeconomic research at Oxford Economics.

The extent of the pain could depend on the duration of the heat waves and the lack of rain. But in countries like Germany, experts warn there is little relief in sight and businesses are preparing 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, Danube and Colorado – are drying up, hampering the movement of goods, disrupting irrigation systems and making it harder for power plants and factories to cool .

At the same time, the scorching heat is hampering transportation networks, straining electricity supplies and hurting worker productivity.

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

China is facing its fiercest heat wave in six decades, with temperatures exceeding 40 degrees Celsius (104 degrees Fahrenheit) in dozens of cities. Parts of California could see temperatures as high as 109 degrees Fahrenheit this week. Earlier this summer, temperatures topped 40 degrees Celsius in the UK for the first time.

The global economy was already under pressure. Europe is at high risk of recession as energy prices soar, fueled by Russia’s invasion of Ukraine. High inflation and aggressive interest rate hikes by the Federal Reserve are undermining growth in the United States. China is grappling with the aftermath of harsh coronavirus lockdowns and a real estate crisis.

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

Something else to fear

Severe weather could exacerbate “existing pinch points” along supply chains, a key reason inflation has been hard to bring down, Oxford Economics’ May said.

China’s Sichuan province, where factories shut down production this week, is a hub for semiconductor and solar panel makers. Electricity rationing will hit factories owned by some of the world’s largest electronics companies, including Apple (AAPL) Foxconn supplier and Intel (INTC).

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

The nearby city of Chongqing, located at the confluence of the Yangtze and Jialing rivers, also ordered factories to suspend operations for a week until next Wednesday to save electricity, state media The Paper reported.

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

Forecasts for the Chinese economy this year have already been lowered accordingly. Nomura analysts on Thursday cut their 2022 GDP growth projection to 2.8% – well below the government’s 5.5% target – while Goldman Sachs cut its forecast to 3%.

Meanwhile, the shrinking German Rhine fell below a critical level, hampering ship traffic. The river is a crucial conduit for chemicals and grain as well as commodities, including coal, which is in high demand as the country races to fill natural gas storage facilities ahead of winter. . It is difficult to find other forms of public transport given the shortage of manpower.

“It is only a matter of time before factories in the chemical or steel industry are closed, mineral oils and building materials reach their destination or heavy and bulky transport can no longer be carried out,” Holger Lösch, deputy director of the Federation of German Industries, said in a statement this week.

Low water levels along the Rhine slashed Germany’s economic output by around 0.3 percentage points in 2018, according to Carsten Brzeski, global head of macro at ING. But in this case, the lack of water was not a problem until the end of September. This time around, it could lower GDP by at least 0.5 percentage points in the second half of this year, he estimated.

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

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

In the American West, an extraordinary drought drains the largest reservoirs in the country, forcing the federal government to implement new mandatory water cuts. It also forces farmers to destroy crops.

According to a survey by the American Farm Bureau Federation, an insurance company and lobby group that represents agricultural interests, nearly three-quarters of American farmers say this year’s drought is hurting their crops – with a loss of significant harvest and income.

The survey was conducted in 15 states from June 8 to July 20 in regions of extreme drought from Texas to North Dakota to California, which account for nearly half of the country’s agricultural production value. In California, a state where fruit and nut crops are high, 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 continue to rise, noted Ward of the London School of Economics. And the impact may not be gradual.

“There are signs that these heat episodes aren’t just getting a bit more intense and frequent over time. It’s happening in a non-gradual way, and that will make it harder to adapt,” Ward said.

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

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