Extreme heat hits the world’s three largest economies at once

Severe temperatures 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 adding upward pressure on prices.

In China’s Sichuan Province, all factories were I ordered a six-day shutdown to conserve energy. Ships carrying coal and chemicals struggle to make their regular voyages along Germany’s Rhine River. People living on America’s West Coast have been told to use less electricity as temperatures rise.

These events “have the potential to be of significant importance to the particular regions affected,” said Ben May, director of global macro research at Oxford Economics.

The extent of the pain can depend on how long the heat waves last and how little rainfall is. But in countries like Germany, experts warn there is little relief on the horizon, and companies are preparing for the worst.

Severe weather and economic slowdown

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

Meanwhile, the scorching heat hampers transmission networks, exhausting energy supplies, and hurting worker productivity.

“We should not be surprised by heatwave events,” said Bob Ward, director of policy and communications at the Grantham Institute for Climate Change and Environmental Research at the London School of Economics. “It’s exactly what we expected and it’s part of a trend: more frequent, more intense, all over 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°C in the UK For the first time ever.

The global economy was already under pressure. Europe is highly at risk of recession as energy prices rise, due to the Russian invasion of Ukraine. Rising inflation and aggressive interest rate hikes by the Federal Reserve are threatening growth in the United States. China is grappling with the consequences of harsh lockdowns caused by the coronavirus and real estate crisis.

“At present, we are at the most difficult point to achieve economic stability,” said Chinese Premier Li Keqiang. He said this week.

Another thing to worry about

May from Oxford Economics said severe weather could exacerbate “current distress points” along supply chains, a major reason why inflation is so difficult to bring down.

China’s Sichuan province, where factories halted production this week, is a hub for makers of semiconductors and solar panels. Power rationing will hit factories of some of the world’s largest electronics companies, including apple (AAPL) supplier Foxconn and Intel Corporation (INTC).

The province is also the center of China’s lithium mining industry. Shutting down may increase the cost of raw materials, which are a major component of electric vehicle batteries.

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The state newspaper The Paper reported that the neighboring city of Chongqing, which lies at the confluence of the Yangtze and Jialing rivers, has ordered factories to suspend operations for a week until next Wednesday to save electricity.

The Yangtze River ran dry on August 17 in Chongqing, China.

As a result, the outlook for China’s economy this year has already been lowered. Analysts at Nomura lowered their 2022 GDP growth forecast to 2.8% on Thursday — well below the government’s 5.5% target — while Goldman Sachs trimmed its forecast to 3%.

Meanwhile, the shrinking German Rhine fell below a critical level, impeding the flow of ships. The river is an important passageway for chemicals and grains as well as commodities – including coal, which is in high demand as the country races to fill storage facilities with natural gas before winter. It is difficult to find alternative forms of transportation given the labor shortage.

“It is only a matter of time before plants in the chemical or steel industries are closed, mineral oils and building materials fail to reach their destination, or large-volume, heavy-duty transportation can no longer be made,” said Holger Loch, deputy director. Confederation of German Industries in a statement this week.

Lower water levels along the Rhine cut about 0.3 percentage points of German economic output in 2018, according to Karsten Brzeski, global head of macroeconomics at ING. But in this case, the low water level wasn’t a problem until late September. He estimated that this time, it may cut GDP by at least 0.5 percentage points in the second half of this year.

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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 a recession in the coming months.

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

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

Nearly three-quarters of American farmers say this year’s drought is hurting their crops — with a significant loss of yields and income, according to a survey by the American Farm Bureau Consortium, an insurance company and lobby group that represents agricultural interests.

The survey was conducted in 15 states from June 8 to July 20 in extreme drought areas from Texas to North Dakota to California, which make up nearly half of the value of the nation’s agricultural production. In California — the state with high yields of fruit and nut trees — 50% of farmers said they had to remove trees and multi-year crops due to drought, which will affect future revenue.

Ward of the London School of Economics noted that without significant investment in infrastructure development, costs would continue to rise. The effect may not be gradual.

“There are indications that these bouts of heat have not become slightly more intense and frequent over time. They are occurring in a non-gradual manner, and this will make adaptation more difficult,” Ward said.

– Laura He, Sean Ding, Simon McCarthy, Benjamin Brown, Aya El Amrousy, Taylor Romain and Vanessa Yurkevich Contribute to the preparation of reports.

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