CRU: How a ‘Super El Niño’ could impact the world economy

This El Niño cycle is expected to be particularly strong, and will likely cause heatwaves and droughts in many parts of the world. In a worst-case scenario, this event could intensify to a ‘Super El Niño’ towards the end of the year, a rare phenomenon last seen in 1998 and 2016 that inflicted catastrophic damage on the world economy and commodity markets.

It’s likely that this El Niño could lead to an increased number of global natural disasters; raising prices on food and energy, while disrupting global trade. In other words, one probable outcome is rising inflation, which will increase the likelihood of interest rates remaining higher for longer.

What is El Niño?

El Niño is the weather phenomenon that occurs when sea temperatures in the Pacific Ocean exceed 0.5˚C (32.9˚F) above normal levels. On average these El Niño cycles happen a few times per decade, and often last up to one year before the sea cools down again. The higher the temperature increase, the more severe impact it will have on the world. Early predictions now point towards sea temperatures in the Pacific Ocean reaching El Niño territory in the next few months. Many scientists warn temperatures could exceed 2.0˚C (35.6˚F) by year end, which would be considered a ‘Super El Niño’.

When sea temperatures cool down and fall to 0.5˚C (32.9˚F) below normal levels, we have something called ‘La Niña’. This occurs less frequently, but La Niña typically lasts longer than El Niño, often as long as 1-3 years. In fact, the world has been in a weak phase of La Niña since 2024, which is now abruptly coming to an end. Sea temperatures are expected to continue to rise sharply for the rest of this year.

What happens during El Niño?

During El Niño years, global temperatures tend to rise and accelerate global warming. This often causes droughts and forest fires, especially in Asia.

However, the weather patterns vary greatly across regions and seasons. Most parts of the world, besides Oceania and Southeast Asia, will see a larger impact during the winter season.

• Oceania and East Asia are typically impacted the most. Expect very hot and dry weather conditions throughout the entire El Niño cycle. In Northeast Asia, the summers are less affected, but later in the year we can expect high temperatures and increased levels of rainfall.
• South Asia experiences a less intense monsoon season in India and temperatures are usually slightly higher than normal.

• Along the west coast of South America, rainfall tends to increase while the rest of the region generally experiences hot and dry weather, particularly in the northern parts of the region and in Central America.
• Africa and Europe are less affected. Africa is typically drier and hotter than average. And in Europe temperatures and rainfall typically increase during the autumn. Historically, El Niño has resulted in drier and milder European winters.
• North America is the region with the most volatility and local differences. The western part of the continent is usually colder than normal, while northern USA and southern Canada tend to be dry. There is usually much higher rainfall in the southern parts of the USA after the summer.

Impact on the global economy

A strong El Niño will have a negative impact on the world economy, mainly driven by the four key factors below. 

• Extreme temperatures caused by El Niño, or in the worst case a ‘Super El Niño’, would increase the number of natural disasters throughout the world, including forest fires, droughts and the spread of diseases.
• Droughts, in turn, reduce hydropower availability in certain markets, increasing the costs of producing and processing certain commodities. Demand for energy alternatives will increase, along with rising demand for cooling, particularly in Asia where a large part of the world population will be exposed to higher temperatures. In other words, an El Niño is likely to result in higher energy prices.
• The heightened risk of natural disasters, low availability of fertilizers from the Middle East (especially sulphur and urea) and rising energy prices would be disruptive for the world’s agricultural production. This will raise food prices worldwide, or worse, even cause shortages in some regions; a factor that would fuel global inflation and extend the need for higher interest rates.
• Global trade will also be affected. Higher energy prices could raise transportation costs and many inland waterways will be impacted by changing water levels. One of the most important arteries for world trade is the Panama Canal. Throughput was severely disrupted during the brief El Niño period at end-2023, when sea temperatures in the Pacific Ocean only reached 1.5 ˚C above normal levels.

This El Niño cycle coincides with the conflict in the Middle East, which compounds the impact on energy and food prices worldwide. This is bad news for global inflation and raises the potential for interest rates to remain higher for longer. A ‘Super El Niño’ would be particularly damaging for the world economy, as it would act as a multiplier of all the risks mentioned above. Scientists have raised the probability of a ‘Super El Niño’ happening at end-2026 and the summer months in the northern hemisphere will provide more clarity on the direction of this forecast.

In CRU’s long term economic outlook, we expect rising global temperatures and a higher frequency of extreme weather phenomena like these to lead to higher and more volatile inflation. Therefore, higher interest rates will be necessary in the coming decades. 

In the next part of this insight series, we will take a closer look at the steel supply chain to see how a potential demand hit could impact the entire value chain, all the way from raw materials production to demand for finished steel.