Predictions out for 2024
The Panama puddles, Bri'ish viticulture, hidden hydropower risks. Plus, what does trade congestion reveal about the macro climate?
News worth knowing
🚢 New year, new bottlenecks at the Panama canal. Drought has crippled the freshwater passage on which depends $270B in annual trade, with daily transit slots down to 24 from 38 ships. Bloomberg explores two long-shot solutions to a crisis that has “set back shipping routes by a century,” as weather-induced chokepoints and warming-induced ice passages mark the start of a worldwide shift in trade flows.
🍇 It’s only champagne if it’s from Hull. Having doubled production between 2017 and 2022, Britain is now the world’s fastest-growing wine region. Thanks to an increasingly favourable viticulture climate (+1.4°C by 2040), a “mini land grab” is underway. In the last five years, UK vineyards attracted £480M (Financial Times) and grew 80% (Economist), with suitable land priced 3x more than farmland.
🌊 Renewables are expecting a rebound in 2024. Could they topple coal? All eyes on China, which leads the world in both renewable development and coal consumption — not as paradoxically as it sounds. Besieged by droughts, hydroelectric provinces have been forced to turn to dirtier fuel. New research (and capex) highlights the challenge for hydropower, which is touted a stop gap for solar and wind but faces underpriced water risks that can reduce annual power generation by up to a fifth.
In depth • Predictions out for 2024
It’s not easy to forecast the weather in a warming world. Extreme climate events are smashing records with growing frequency and ferocity, piling complexity onto an already complicated science — one with growing macro significance. For investors and economists, environmental disruption is another wildcard in an era stuffed full of them.
Navigating entangled variables is demonstrably difficult. In the last couple of years, we’ve watched renewable investors (and developers) underprice macro risk, and heard copious takes on [macro] investors (and economists) underpricing climate risks. Both parties have repeatedly misread supply risks, too — latterly with pretty major ramifications, according to new research.
From the WSJ (How Supply-Chain Snarls Made Everyone Wrong on Inflation):
When US inflation first began to heat up in 2021, it was written off as a temporary thing. As 2022 got underway, the New York Fed’s Global Supply Chain Pressure Index showed the shipping snarls that had beset the economy were untangling. By September 2022, it was back to pre-pandemic levels. But inflation kept running hot.
By then some economists were advancing a new narrative—one in which inflation was getting driven by a tight labor market. Since then, however, inflation has cooled markedly even though unemployment stayed low. How could this happen? At least a partial explanation might be that those supply-chain problems really were transitory, but were also in place longer than most economists realized.
Instead of freight costs — the most widely used proxy for supply-chain disruptions, underpinning the New York Fed’s index and similar indices — researchers looked at port congestion in every month between 2017 and 2023. Drawing on maritime satellite data for containerships worldwide, they derived an Average Congestion Rate (ACR) that looks relatively familiar.

The authors posit that a) policymakers could have reined in inflation better and faster with different indicators, as b) the tried-and-tested ones are flawed. PMI surveys are subjective. Shipping prices “internalize endogenous movements… that might be unrelated to supply chain disruptions.” In other words, economists may discount exogenous risks relative to endogenous data.
It follows that more physical risk leads to more macro missteps.
So what?
Extreme weather isn’t the only catalyst for supply shocks (geopolitical risk claims the crown this week), but it is a big and growing factor. Most of the world’s traded goods travel through its 1,340 ports, of which 86% are exposed to at least three climate hazards. It takes just one to bring shipping to a standstill. Climate-related port downtime comes with an annual price tag of up to $81B and $122B for global trade and economic activity, respectively, according to one recent study. (Recent-ish, from a news-cycle perspective. Eulogies for the drought-stricken Panama Canal weren’t yet a thing in July 2023.)
Exogenous shocks are a blindspot even within climate data. Relative to transition risk, physical risks are cited half as frequently in US corporate disclosures. Of the 5,000 companies that disclosed with CDP in 2023, 80% said they were exposed to climate risks, yet just 53% claimed physical risks could damage operations (and only 40% disclosed the potential financial impacts). More importantly, despite outweighing direct costs by an order of several magnitudes, the indirect costs of natural disaster, such as Typhoon Doksuri, are overlooked on a systematic basis.
What next?
Go figure. Exogenous shocks are, by definition, unpredictable. Meteorologists can’t add much colour to the grey area between acute and chronic weather extremes, the market reverberations of which hinge on a vast number of variables. Carried by El Niño, for instance, this year is forecast to be the hottest on record and break into the top five most active for hurricanes — but sluggish economic growth and comfortable surplus in its inaugural months would likely mute any immediate impact. Projections turn into guesses beyond that, leaving only a high probability of improbable events.
That’s not bad news for everyone. For the right investors on the right side of the right trades, it stands to reason that market inefficiencies will be to physical risk what the Inflation Reduction Act has been to transition risk, i.e. opportunity. In the meantime, annual predictions are out.