Just as the global economy cautiously emerges from one crisis, another is beckoning at the doorstep, one that is completely out of politicians’ control.
Markets and businesses breathed a sigh of relief last weekend when President Donald Trump announced a pending deal with Iran to cease hostilities in the Middle East and reopen the Strait of Hormuz to ship traffic. That blockaded chokepoint alone has sent energy prices and overall inflation soaring worldwide in recent months. Physical oil prices alone surged to $140 a barrel at one point, their highest level since 2008.
That brief relief seemingly ignored an announcement from the National Oceanic and Atmospheric Administration (NOAA) just a few days earlier, that could create more intractable trouble for businesses in the months ahead. An El Niño event—a natural pattern generally associated with balmier temperatures—has now officially formed over the Pacific Ocean, and early forecasts suggest it will be a whopper, both for the weather and for the global economy.
While it is still early in the cycle, this El Niño promises to be an intense one, and the weather ripple effects could quickly cascade globally. Past events have strained supply chains, raised costs, and exacerbated risks in sectors vulnerable to weather shifts, such as agriculture and the larger global food supply chain. Assuming current forecasts are accurate, the beast currently forming over the Pacific Ocean could do much more than tweak rainfall patterns.
“El Niño is often treated merely as a weather story, but in 2026, that risks complacency,” Robert Muggah, a political scientist who has advised multiple governments on security issues, wrote in a World Economic Forum blog post earlier this month.
“The latest outlook should be seen as an early warning to governments, companies and aid agencies to prepare for what could be a major systemic shock,” he wrote.
Rain, drought, and trillions in losses
El Niño tends to form every few years due to weakening wind patterns over the Pacific Ocean, with conditions generally lasting up to a year. Usually, prevailing winds push warmer surface water away from the Americas towards Asia and Oceania, but El Niño disrupts this process, leaving warm water close to North and South America’s shores. This impacts weather patterns worldwide, influencing everything from drought conditions in Indonesia to heavier precipitation in the southern U.S.
The strength of an El Niño event is generally tied to how much water in the Pacific Ocean warms above average, and some early forecasts are already cautioning of a particularly intense event this year. NOAA’s announcement last week predicted a 63% chance of sea surface temperatures surpassing 2.0°C in the Pacific, a threshold that would signal a “very strong” El Niño. Earlier this month, the World Meteorological Organization offered a similar forecast, projecting an event that will be “at least moderate—and possibly strong,” similar to past El Niños accompanied by significant warming.
That bodes poorly for the world economy. A 2023 paper published in Science analyzed the costs associated with two particularly strong El Niños, occurring in 1982 and 1997—two of the three strongest El Niño events on record—finding that the resulting impact to weather patterns caused global income losses worth $4.1 trillion and $5.7 trillion, respectively. These costs mainly manifested in damages from extreme weather events, such as lost agricultural output due to heatwaves and flooding.
Over the course of the 21st century, the cumulative effects of El Niño events could add up to $84 trillion in economic losses, the study found.
Forecasts of costs specifically associated with this year’s El Niño are likely still a few months away, but analysts are already pricing in a difficult year ahead, largely because many models are predicting a 2026 El Niño of comparable strength to past intense ones. The impact will be most severe in poorer countries, according to an analysis published Monday by Fitch, a ratings agency. Countries that rely on agriculture will likely see higher costs and more damages caused by environmental factors, although inflation will be a global problem, with even wealthy nations feeling the costs of higher food prices.
“Sustained shortages could amplify risks to globally traded food commodity prices posed by an El Niño phenomenon, potentially affecting inflation prospects even in highly rated sovereigns,” the Fitch analysts wrote.
Several staple crops commonly grown in more vulnerable countries—including wheat, corn, and rice—will likely see price increases throughout the El Niño cycle, according to another forecast published Monday by the European Commission. The consequences of a strong El Niño will also collide with the lingering effects of the war in Iran, which has already impacted global prices for common agricultural inputs, such as fertilizer.
Even those items that can be produced will be hamstrung by constraints to global trade. In addition to high fuel prices stemming from the war, El Niño has historically hampered shipping by causing low water levels in critical transit points. In 2023, a strong El Niño led to a prolonged drought in central America, bringing water levels in the Panama Canal down to historic lows. The event forced operators to cut daily transits from 36 ships to just 24.
A recent update from the Panama Canal Authority projected few material changes to transit volume this year, but signaled it was already banking on operational changes in 2027, when the effect of El Niño on water levels is forecasted to peak. The global economy was already pricing in disrupted energy supplies well into next year, but it might have to brace for a few more hits as well.
