• El Niño, a climate pattern that brings warmer sea temperatures to the Pacific Ocean and triggers extreme weather events throughout the world, has arrived and is likely to persist until 2024, according to the US National Oceanic and Atmospheric Administration. The volatility of the phenomenon complicates any assessment of its net economic effect. With that caveat, and based on current meteorological reports, we expect that El Niño will have a sizeable but uneven economic impact across Latin America and the Caribbean. 

• The effects of El Niño will vary by geography and season, but its impact will be most apparent in the primary, infrastructure and electricity sectors amid changing precipitation patterns. For example, Peru’s economy is likely to suffer the most in January‑May, owing to high temperatures and floods along the northern coast, which typically cause infrastructure damage and reduce agricultural and fishing output. Some shocks are already being felt, but these will recede during the June‑September dry season.

• Meanwhile, Argentina’s fertile Pampas region will benefit from above‑average rainfall, particularly in September‑January; this will put an end to a devastating drought that has slashed agricultural production. The opposite will occur in northern and north‑eastern Brazil, western Mexico, Colombia, Central America and the Caribbean, where drier weather towards end‑2023 will hamper agricultural production and raise the risk of forest fires, especially in the Amazon rainforest.

• In Brazil’s centre‑west region (its agricultural belt), the impact of El Niño will be mixed, as it is a transitional area, where higher rains to the west give way to drought conditions to the north and east. We expect bouts of higher temperatures that, if too intense, could reduce yields of important crops. 

• Notwithstanding this heterogeneity, the region is likely to experience one common challenge: short‑run inflationary pressures. Assuming that there is some domestic disruption to production and supply chains, most countries will face price pressures. The intensity of these will largely depend on the weight that foodstuffs have in each country’s inflation basket. In this context, and depending on the severity of El Niño, one of the main risks to the region stemming from the weather pattern is that monetary policy could remain more restrictive for longer than we currently expect.

• El Niño’s effects on Latin America are also likely to have global repercussions. The region’s predominance in agricultural and mining markets means that any domestic supply shocks will influence global commodity prices. Moreover, drier weather in Panama could temporarily upend international trade, given that 6% of maritime trade moves through the Panama Canal. There are already constraints on Panama Canal operations—an issue that could become more acute in 2024. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the economic, political and policy outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.