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Geopolitics has been the obvious culprit behind this year’s energy supply disruption and the inflationary pressure that followed. A second, less familiar risk is now coming into view: meteorologists are monitoring conditions that could develop into a lengthy El Niño event, with the potential for a profound and far reaching economic impact.
A regional risk, not a global shock
Rather than triggering a single global inflation shock, a prolonged El Niño could create overlapping pressures across agriculture, fertiliser and energy markets. Contrary to the common assumption that its effects are felt equally everywhere, the impact is likely to be highly regional and unevenly distributed: a dynamic that could prove particularly challenging for more vulnerable economies this year, and where investors’ attention should be focused.
IMF research1 shows that El Niño has historically accounted for around one fifth of movements in global commodity price inflation, with past episodes driving up food and energy prices as weather disruptions worked their way through supply chains. Geographically, the weather effects have been felt most acutely across parts of Southeast Asia, India and Australia, while other major agricultural producing regions such as the US Midwest and Western Europe have tended to be less exposed.
The economic consequences of that weather exposure are a different matter. Inflationary pressure has historically been most pronounced in economies where food makes up a larger share of household spending and policy buffers are weaker, highlighting why markets are unlikely to experience the impacts equally.
Agricultural commodities and energy
A prolonged El Niño could disrupt production of key agricultural commodities including rice, wheat, palm oil and pulses, adding to food price pressures. Global inventories look healthy enough in absolute terms, but stocks relative to demand are considerably tighter than headline figures suggest, leaving markets more exposed to any disappointment in this year’s harvests.
Duration is likely to matter more than headline intensity. Should conditions persist into next year, the risk of meaningful disruption to agricultural systems rises significantly.
The inflationary implications may also extend beyond agriculture. Drier conditions can reduce hydroelectric generation just as hotter weather pushes up electricity demand, increasing reliance on alternative sources such as natural gas and adding a further channel for inflationary pressure.
Resilience will vary widely across emerging markets
How much disruption any individual emerging market faces depends on a range of factors, and there is no one size fits all outcome. Some economies have spent years building credible policy frameworks that have strengthened macroeconomic buffers such as FX reserves, putting their central banks in a better position to look through temporary food price shocks. Others remain significantly more exposed.
Resilience is only part of the picture, however. The bigger concern is when shocks begin to overlap: if higher energy prices coincide with fertiliser constraints and weather related food inflation, the combined impact becomes broader and more persistent than any single shock on its own.
Uncertain timing, divergent outcomes: the case for country selection
Pricing El Niño’s economic impact is inherently difficult. The question is rarely whether inflationary pressure will materialise, but whether it surfaces within months or much later, which makes positioning portfolios in advance challenging.
That timing risk is compounded by how differently individual markets respond. Colombia, for instance, has historically experienced drought during El Niño episodes, putting pressure on hydroelectric generation, food prices and inflation, whereas Argentina has often seen improved rainfall that boosts agricultural output and export earnings. Such divergent outcomes underscore why a country by country approach is likely to add more value than broad regional positioning.
Climate risk as macroeconomic risk
For investors, climate events are increasingly macroeconomic events. Their reach extends well beyond agricultural production into inflation, monetary policy and, ultimately, financial market returns. Identifying which countries have the resilience to absorb temporary shocks and which remain more exposed may prove just as important as tracking the weather itself.
1. El Niño and World Primary Commodity Prices, IMF Working Papers, Volume 2000, Issue 203 (2000).
