The world economy finds itself at a quite “shaky” juncture right now. Having so much to deal with during the past couple of years - from trade shake-ups due to Trump tariffs and the oil shock due to the Iran war – the economy continues to progress amidst soaring levels of uncertainty. While implications of those past events are dealt with right now, the global economy continues to plan ahead in preparation for future possible events that could further alter its trajectory. One such phenomenon brewing right now that could possibly carry widespread economic consequences across the world is the El-Nino climate condition that is expected to take effect as we speak.
The latest update by the World Meteorological Organization (WMO) indicates an 80% likelihood of an El Niño event during June-August 2026 with over a 90% probability of it continuing until at least November this year. While this is not the first time the world faces an El Niño condition, the alarming feature is the intensity of it compared to the past and the possible implications it could enforce on the world economy that is already dealing with a lot currently.
What is El-Nino and how has it occurred in the past?
El Niño is a climatic phenomenon distinguished by intermittent increases in sea surface temperatures within the central and eastern equatorial Pacific Ocean. Its occurrences are sporadic, typically happening every two to seven years, and it possesses extensive consequences to worldwide weather patterns. When the sea surface temperatures in the eastern equatorial Pacific Ocean is relatively warmer compared to the central equatorial Pacific Ocean, these conditions are known as “El Niño” conditions. When the reverse is true, these are known as “La Niña” conditions.
Simply put, shifts in rainfall and temperature patterns across continents, raise the likelihood of drought in some regions and floods in others. Those meteorological shifts then cascade down to agriculture, energy, health and go all the way down to the social lives of people causing broader demand and supply disruptions that may alter the economic trajectory of countries.
The last El Niño, in 2023 to 2024 – which meteorologists said was strong, contributed to making 2024 the hottest year on record, said WMO Secretary-General Celeste Saulo. Predictions by the UN Agency at the point of writing this piece indicates the upcoming El-Nino phenomenon to be “at least moderate – and possibly strong”.
While each El Niño event is unique in terms of its evolution, spatial pattern and impacts, the broader perspective for the South Asian region signals below average monsoon rainfall and above average temperatures according to the South Asian Climate Outlook Forum.
How can it affect the current economic landscape?
Farmers, fishermen and small-scale producers often absorb the first blow. Be it floods or draught – depending on which part of the world one is at – severe disruptions to the harvest, spreading of pollutants and increased risks to cultivations may be common.
In the event of a worse-case scenario, commodity markets which are already facing steep ups and downs, can face further price volatility even amidst moderate disruptions – particularly across fertilizer, fuel and agriculture commodities. Supply disruptions due to lower yields may push farm costs up and reduce food supplies that could weigh in food inflation. Low rainfall could also impact energy generation and fuel prices may experience further spikes causing more stress on vulnerable economies – particularly those in dry regions and rely heavily on hydro. Consumer markets may also face some level of demand destruction especially in non-essential spending if energy prices bite into inflation and raise everyday cost of living which are already on the rise in many countries.
A combination of these costs could further dampen growth which is already revised down as a result of the most recent oil supply shock. Depending on how bad the situation gets, governments may also enact export controls, subsidies, rationing or emergency imports which could possibly distort markets and cause distress in the short term. Given the volatile and heavily uncertain nature of the current global economic context, a severe climate disruption of a large scale – as most expect – would be the last thing the economy would welcome.
What this means for Sri Lanka?
As we’ve repeated many times before, the structural change in Sri Lanka’s macroeconomic landscape has now put the economy in a better footing to deal with external shocks like this than in the deficit driven past. A good example of this is how the country remains resilient currently despite the effects of arguably the biggest oil shock it has faced. While strong Fiscal space and FX surpluses serve as strong buffers to shield the country from the costs of such events, it doesn’t mean short-term pains are out of the picture.
Yes, the government does possess better ability to amplify relief efforts and increase imports if disruptions happen but maintaining growth and stable price levels remains key within the country’s broader macroeconomic trajectory. The structural changes taking place in the country’s energy mix and inflation are also factors that could support therein, helping the country to better deal with a El-Nino condition.