Rising global temperatures can hurt global GDP

A study released by the science journal Nature makes the connection between the rise of global temperatures and the negative impact this can have on GDP around the world. In the study, titled “Global non-linear effect of temperature on economic production”, researchers found that “fundamental productive elements of modern economies, such as workers and crops, exhibit highly non-linear responses to local temperature even in wealthy countries.” Meaning as temperatures rise, the effect is much greater and accelerates in ways that are potentially disastrous. (1)

One of the lead authors, Marshall Burke of Stanford’s Department of Earth System Science, calls their study “the first evidence that economic activity in all regions is coupled to the global climate.”

The study continues, “If future adaptation mimics past adaptation, unmitigated warming is expected to reshape the global economy by reducing average global incomes roughly 23% by 2100 and widening global income inequality.”

In 2019, weather patterns were disrupted, and global temperatures rose dramatically. In February temperatures in the arctic hit 84 degrees. In June, temperatures in Siberia were 90 degrees and winds carried that heat deep into the Arctic. As of June of 2019, the Arctic has experienced record ice melt drawing a blue ocean event forward much sooner than expected. In late June temperatures in Kuwait hit 145 degrees in full sun. In the same week, In France a heat wave brought temps of 121 degrees.

In India in 2019 excessive heat led to a severe drought, disruption of the monsoon season and loss of fresh water. “Chennai, India, the country’s sixth-largest metropolis with 4.65 million people, is facing a dire water shortage.” (2) Because of the heat the cities four reservoirs have dried up.

“The monsoons, that usually start in June, are late this year and even if the region were to get a little rainfall, it would not help the ever-growing problem that takes in a myriad of issues, including poor management, overusing groundwater, and a shifting climate turning the hydrological cycle on its head.”

“City officials have been relying on a mix of desalination plants and water being brought in by train and truck to quell the increasing unrest as people wait in lines for hours to get water from municipal or private tankers. The lack of water has affected the poorest residents the hardest.” On some occasions the police were called in to maintain peace and order.

Chennai is one of 21 major cities in India expected to run out of water in the next few years. Chennai ran out of water in July 2019… an environmentalist based in Chennai said, “The two most powerful agents of change—politics and business—have visions that are too short-sighted. Unless that changes, we are doomed.” (8)

“It’s a global problem, not just Chennai,” said Arun Krishnamurthy of Environmentalist Foundation of India. “We need to work together to ensure that we have a water-secure future.”

In February 2021, “the Chennai Metropolitan Water Supply and Sewerage Board did not respond to questions about the issue. The Tamil Nadu Water Supply and Drainage Board did not reply to an e-mail seeking comments.”

Chennai is one of the biggest and most-visited cities in southern India and as a result of the water shortage, there will be a huge impact on the hospitality sector. (5)

“More than 4.8 million foreign tourists visited Tamil Nadu in 2017, making the state one of the top three tourism destinations in the country, according to India’s Ministry of Tourism.”

In addition to asking guests to conserve water, some hotels have reduced working hours and stopped offering some dishes which consume more water.

“Almost all hotels in the city now depend on private tankers for water supply. But because of the huge demand for tankers, it is becoming impossible for them to fulfill the needs of the city.”

Another victim of the water crisis is the automobile sector. “Off-take data for May paints a grim picture with domestic passenger car sales down 26.03 per cent to 147,546 units.” (4) India also saw commercial vehicle sales drop 10% and two-wheeler sales drop 6.73%. Drier conditions in June could have an even more devastating impact on vehicle sales as the economy continues to slow.

What is the response of the government to the water crisis?

Prime Minister Modi said, “There is no one formula to deal with the water crisis across the country.” (3)

However, many people feel the government response is inadequate. “The government is doing nothing to regulate groundwater use,” said Himanshu Thakkar of SANDRP, a non-governmental organization that advocates for better water management practices.

The impact on farming is particularly hard. Because of the drought over the past few years, thousands of farmers have committed suicide. Modi promised in a recent election that he would increase farmer incomes. According to Skymet CEO Yogesh Patil, “Consecutive below normal monsoon seasons will result in lower loan disbursal, strained loan recoveries and rising NPAs (non-performing assets) and it will definitely put strain on major rural sector lending banks and NBFCs (non-bank financial companies).” (4)

“Besides inducing a slowdown in demand, the weather phenomenon can also change the composition of the government’s budgetary commitments — as funds earmarked for capital expenditure might be diverted to implement schemes to protect farm incomes.” (6)

As the government is forced to fund support programs for those affected and as tax revenues slow due to a slowing and impacted economy, the central bank may be forced to issue bonds to finance that debt. As the supply of bonds rise, its possible interest rates and bond yields will rise as well potentially creating additional financial issues for India.

“Food makes up nearly half of India’s consumer price index, which the Reserve Bank of India monitors when deciding on monetary policy, including interest rates. Bumper farm output would keep food prices under control.” (6) However, that’s not where the situation currently stands. Inflation due to a constrained supply of food is a very real possibility.

The impact of climate change on poorer, less developed countries will be much greater than wealthier industrial countries. The “situation is going to get worse, according to many scientists, especially as more people move to already over-crowded cities, stretching water supplies that are more often than not, mismanaged in the first place.” (6)

That said, a 2018 study by the Richmond Fed found, “Overall, these findings suggest that rising temperatures in the future could hamper economic growth in a variety of industries even in developed nations such as the United States.” (7)

This data changes the way we need to plan our financial futures. This is not “Leave It To Beaver” 1960. We are in a new world and need to re-examine how we as individuals get financially from point A to point B.

We need to be proactive in designing a plan that can improve our chances for financial success regardless of the economic storms that occasionally buffet the market.

If you have questions about investing in the market in this environment, please reach out to me to discuss options that can help you protect your lifestyle regardless of what happens in life. Contact me at james.cox@glic.com

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Email: james.cox@glic.com

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2021-121279 exp 5/23

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