A strong El Niño event is developing rapidly with potentially significant consequences for the global economy. The World Meteorological Organization (WMO) reported at the end of July 2026 that El Niño was intensifying and was expected to strengthen further towards the end of the year. Forecast models indicate that sea-surface temperature anomalies of close to 2.9°C could appear in key monitoring regions, putting the event among the strongest El Niño episodes in the historical record.
El Niño at a critical global juncture?
El Niño is a naturally occurring climate phenomenon associated with unusually warm sea-surface temperatures, in particular, across the central and eastern tropical Pacific Ocean. The warming changes atmospheric circulation and disrupts normal weather patterns across large parts of the world. The WMO estimates that there was an 80% probability of El Niño conditions developing during June–August 2026, with the probability rising to around 90% for the following months.
Reuters reports that the strong El Niño events of 1982–83 and 1997–98 were associated with estimated global economic losses of around $4.1 trillion and $5.7 trillion respectively. However, the current event is occurring under different circumstances. Global supply chains remain exposed to geopolitical disruptions, while fertiliser and energy markets are already under pressure due to conflicts in the Middle East.
On top of it, the current El Niño conditions are developing at a time where global temperatures and ocean temperatures are already exceptionally high. As a result the WMO expects above-normal temperatures across much of the world during the August–October period, while rainfall patterns are expected to become increasingly uneven.
However there’s a slight counterweight, a positive Indian Ocean Dipole (IOD) is also expected to develop, around the similar period. This occurs when sea-surface temperatures become unusually warm in the western tropical Indian Ocean and cooler than normal in the eastern Indian Ocean. This temperature contrast could change wind patterns and pump more moisture-laden air towards the South Asian region. While a strong El Niño typically promotes drier conditions or suppresses rainfall in parts of South Asia, a positive IOD could partially offset these effects. When both occur together, the positive IOD can cushion El Niño’s drying effects, potentially resulting in heavier-than-expected rainfall or mitigating extreme drought risks during monsoon transition periods.
What are the costs attached to such conditions?
El Niño does not produce the same weather conditions everywhere. Some regions experience drought and extreme heat, while others receive unusually heavy rainfall and flooding. These changes can affect agricultural production, fisheries, hydropower generation, transport infrastructure and energy demand. The economic importance of El Niño therefore comes from its ability to simultaneously affect supply, prices and productivity across several sectors.
The most immediate economic transmission channel is likely to be food prices. The FAO has warned that a combination of geopolitical conflicts, higher energy and fertiliser costs and the effects of El Niño could create a new wave of global food inflation. When droughts, floods or extreme heat reduce agricultural output, global supplies of affected commodities decline, resulting in higher prices. These higher commodity prices can eventually feed into consumer prices for food and beverages.
El Niño can also affect energy markets through both supply and demand. Hotter temperatures increase demand for electricity for cooling, while drought conditions can reduce water availability for hydroelectric power generation in some regions. At the same time, extreme weather can disrupt energy infrastructure and transportation networks. This creates the possibility of higher electricity and energy costs in vulnerable economies, adding another source of inflationary pressure with current energy prices already seeing upward pressure due to the uncertainties around Iran.
How will Sri Lanka be impacted from all this?
For Sri Lanka, El Niño is particularly important because the country is highly exposed to changes in rainfall, agriculture, as well as food and energy costs. Changes in rainfall and temperature could affect the production of agriculture and energy generation. A reduction in domestic agricultural output could add further pressure to the current account by requiring additional imports of goods in short supply. This could also add to inflationary pressures, which have already shown signs of volatility.
In terms of hydropower generation, if El Niño-related weather patterns reduce water availability in strategic areas, Sri Lanka could become more dependent on thermal generation and imported fuel. However significant growth in solar generation still acts as a significant counterweight towards it but still a reduction in hydro still opens up space for a possible increase in costs for energy generation.