- Scientists warn that this year’s El Niño cycle could intensify, with impacts varying significantly across regions.
- Its effects extend to energy transitions, commodity prices and inflation and can destroy productive assets in the most affected areas.
- Understanding the dynamics is increasingly important, not only for assessing short-term economic and financial market impacts, but also for identifying the adaptation and mitigation measures most appropriate to each context.
Getting to know El Niño
El Niño is a recurring climate-related shock that usually develops around Christmas, which is how it came to be named after the ‘Christ Child’. The name may sound benign, but its effects are not. Sea surface temperatures can rise by up to 2°C, with this pattern typically occurring every three to seven years, redistributing heat and moisture across the planet. Scientists warn that this El Niño cycle could intensify, with recent satellite measurements showing a sharp rise in sea-surface temperatures across the tropical Pacific. The World Meteorological Organization (WMO) estimates an 80% likelihood of a shift to El Niño conditions later this year.
El Niño events have been recorded since 1957, with 11 of high intensity reported. No two events have been identical in intensity or impact, with different global implications. Some regions experience drought, while others face heavy rainfall, heatwaves, wildfires and broader warming. Because El Niño can last for several months, it also increases the risk of multiple weather shocks occurring at the same time.
Economic ripples
El Niño’s economic footprint reaches far beyond weather. It can move commodity prices, reshape energy demand, disrupt renewable power generation, add inflation pressure and destroy productive assets with long-term and cross-border consequences. The ripple effects largely depend on location and how countries can manage its increasing intensity:
Energy: shift in supply and demand. El Niño’s record temperatures building up in India and China have already lifted electricity demand, supporting coal producers as power systems rely more heavily on thermal generation. Normally in China, when power demand is elevated, coal plant dispatch increases. In Latin America, drought caused by El Niño has exposed the vulnerability of hydropower-dependent systems within and between countries, leading to blackouts and the use of costly back-up fossil fuels’ generated plants. In the US, weather conditions could support hydroelectric energy recovery in California, potentially starting as early as August.
In Europe, the Nordics are expected to have heat and calm winds, reducing wind generation potential while amplifying solar availability. However, when solar panels get very hot, electrons inside them move around more, which lowers panel voltage and reduces electricity production. During heatwaves, solar panel lifetime can be reduced by as much as 20-80%. This can increase intraday volatility and raise the need for dispatchable power to balance the grid.
Commodities: crop impacts differ sharply. El Niño’s impact on agriculture varies by crop, country and event. Historically, it has been associated with stronger soybean harvests in the United States and South America, but weaker soybean yields in Asia. In the US, wheat and corn yields have usually been more negatively affected than soybeans. This suggests that resilience varies by crop even within the same region, which makes crop-specific assessments important for planting decisions. Fisheries are highly impacted by the high water temperatures in the northern part of South America forcing fish to migrate and return only when temperatures cool down. For the fishers in the affected areas, it means less business and less income.
Inflation: emerging markets more exposed, often short-lived. El Niño usually has only a modest effect on food inflation in advanced economies, but the impact can be much larger in emerging markets, where food represents a bigger share of household spending. El Niño frequently can transmit price shocks across markets and create inflationary pressures, albeit for a short period. As mentioned, staple prices are particularly vulnerable but not uniformly impacted. For the 2026-27 event, crop productivity may come under pressure in Sub-Saharan Africa, India, China, Australia and Brazil, potentially pulling global food prices in different directions depending on local weather shocks.
From prediction to protection
From a mitigation perspective, long-term strategies should reduce exposure to climate shocks, including through the phasing-out of fossil fuels. This can reduce the risk for future generations of amplified impact of El Nino and other climate-related hazards. From a damage control perspective, contingency plans and safety nets must be ready before disruption hits. Recent shocks, including the closure of the Strait of Hormuz, show why emergency responses cannot be improvised. Countries preparing for El Niño should focus on long-term and immediate actions that will be useful to reduce the impact in the future, including:
- Protecting households and small businesses quickly. Pre-arranged disaster funds and targeted cash transfers can help safeguard food security and livelihoods when shocks occur in the most vulnerable countries.
- Building better food management. Improving monitoring of global stocks of staple crops such as wheat and rice, alongside diversified import sources, can strengthen resilience by helping governments and markets anticipate and respond to food supply disruptions.
- Protective planning. Strengthening risk-sensitive urban and rural planning could mitigate losses, for instance by restricting land-use decisions and type of constructions in high-hazard areas.
- Pre-arranging finance. Prevention requires resources. Where fiscal gaps are wide, rapid and flexible pre-arranged public and private financing mechanisms can support action before extreme weather disrupts agricultural seasons, food security and livelihoods. Multilaterals, like the World Bank and IMF, offer climate financing, largely directed to the most vulnerable countries for adaptation and mitigation. Deliberate credit and investment guidance can also help move capital to those activities that build resilience.
- Investing in climate-resilient agriculture. Governments and the private sector can support drought- and flood-tolerant seeds, better irrigation, animal health support and incentives for more resilient household production. In Central America, timely distribution of drought-tolerant and short-cycle seeds helped families grow vegetables and improve food supplies.
- Insurance. Embedding financial protection through insurance is an increasing practice, but certain climate events are becoming more costly or impossible to insure. Finding insurance structures that allow better burden sharing across countries, rather than at the national level, can heavily offset losses for businesses and households and consequently mitigate the impact on production and GDP. Insurance coverage for recent floods in Spain, in contrast to Pakistan where insurance coverage for floods was minimum is an illustration of how household and businesses face completely different exposures and economic impact because of the insurance protection gap.
El Niño should not be treated as a temporary weather event, but as a recurring stress test for food, energy and financial systems. The countries and communities most exposed to El Niño cannot afford reactive responses. Resilience must be built in advance through actions such as investing in renewable energy transitions and stronger food systems, while phasing out fossil fuels.