Drought woes add to Europe’s recession risk

By James Langton | August 11, 2022 | Last updated on August 11, 2022
2 min read
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The economic costs of physical climate risks aren’t just the result of damaging storms and wildfires; in Europe this year, widespread drought is inflicting pain too.

In a new report, National Bank Financial Inc. (NBF) forecasts Europe falling into recession in the second half of the year, as the region’s drought conditions add to the forces of high inflation, particularly energy prices.

Among other things, hot temperatures and a lack of rainfall in Europe this summer have led to several major waterways — including the Rhine, Po and Danube rivers — drying up, disrupting shipping in the region.

“Agriculture will obviously be affected by the lack of water, but the bulk of the economic impact is likely to be felt through increased shipping costs,” the report said, as the low water levels mean that ships must carry smaller loads, increasing shipping costs.

“The low water levels reduce the capacity of barges to ship both raw materials and finished goods along the river, straining supply chains,” said Moody’s Investors Service in a separate report on the issue.

This latest supply challenge is yet another driver for inflation. For instance, shipping costs on the Rhine have jumped ten-fold since the start of the year, the NBF report said.

“The situation could still deteriorate further,” it warned, as the Rhine could become “virtually impassable” if levels fall much more.

Moreover, there aren’t any good alternatives to river-based transport, it said, “with Germany’s rail network already congested and its trucking industry suffering from an acute shortage of drivers.”

Alongside the effects on shipping, Moody’s noted that companies based along the Rhine have had to reduce production due to both the low water levels, and the fact that these low levels are accompanied by higher water temperatures, which limits cooling capacity.

“If the worst were to happen, the entire energy sector would be at risk,” NBF warned.

Already, with many countries turning to coal to replace disrupted Russian gas imports, coal shipments are being disrupted by the shipping challenges.

At the same time, NBF noted, “Norway is curbing electricity exports to allow many of its hydroelectric reservoirs to replenish and several French nuclear power stations have been forced to reduce/stop their activities” due to a lack of water for reactor cooling.

These limitations on electricity supply result in “even higher operating costs,” Moody’s said.

“The river’s low water level demonstrates how climate change has a tangible negative effect on companies’ operations, profits and credit quality, and may require strategic changes or mitigating actions,” Moody’s said.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.