The economic impact of extreme heat

This is an audio transcript of the FT News Briefing podcast episode: ‘The economic impact of extreme heat’

Marc Filippino
Good morning from the Financial Times. Today is Monday, July 31st, and this is your FT News Briefing.

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Investors are keeping a close eye on Japan. And China’s starting to pump stimulus into the economy, just not as aggressively as it’s done before.

Joe Leahy
This is not going to be the bazooka of the past, but we are going to see them taking very precise and well-targeted measures.

Marc Filippino
Plus, if you haven’t noticed, it’s super hot out there. And extreme heat is a real danger to people as well as the economy. I’m Marc Filippino, and here’s the news you need to start your day.

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The Bank of Japan on Friday announced that it’s going to allow bonds to rise more freely, which sounds kind of wonky, but it’s really got the attention of investors. So I’ve got Ethan Wu to help me unpack this. He writes the FT’s Unhedged newsletter and hosts the FT’s Unhedged podcast. Hi, Ethan.

Ethan Wu
Hey, Marc.

Marc Filippino
So what exactly does this move do?

Ethan Wu
It’s a bit of a fiddly change, isn’t it? And there’s a lot of moving parts here. But just in the simplest, most kind of essential point is that for 10-year yields, which set the cost of borrowing in financial markets and the economy, in that key policy rate, they’re going to let it rise a little bit higher.

Marc Filippino
So, Ethan, how are investors feeling about this, are they psyched?

Ethan Wu
I think investors are excited or at least at the very least interested. So in a vacuum, any incremental move from the Bank of Japan to raise rates is exciting for investors in Japan who might want to buy Japanese government debt. There’s also the context of the rally in the Japanese stock market this past year. It’s been one of the best performing stock markets in the world. And now there’s a question of: will higher rates cause Japanese domestic investors to bring back money they’ve invested elsewhere in the world to Japan, thereby potentially flowing into the Japanese stock market, fuelling another leg of stock market appreciation. This is all very unclear at this point. What is clear is there’s a catalyst for things changing in Japanese markets, and I think room for excitement on the yen, room for excitement on the Japanese stock market and room for excitement on the bond market, too.

Marc Filippino
So what’s the broader economic context for this, Ethan?

Ethan Wu
Inflation is back in Japan in a big way. I mean, a one just really shocking statistic that, you know, listeners may have heard, but it’s just . . . it’s so remarkable is that Japanese headline inflation is higher than US headline inflation.

Marc Filippino
And this is what they wanted, right? They wanted inflation.

Ethan Wu
Absolutely. I mean, this has been the dream of central bank governors and finance ministers in Japan for decades, and they finally achieved it. The question is, you know, how sustainable is this new elevated inflation equilibrium for Japan? Is it kind of transitory? If it is transitory, the central bank doesn’t want to tighten monetary policy. On the other hand, if inflation really is here to stay, you need tighter policy. You need to constrain inflation. So it’s a very difficult policy balancing act for the central bank. And I think that’s why one of the clearest ways to see this move from the BOJ is as buying more time. They’re doing this kind of wonky technical tweak that will have big implications, is having big implications, but it’s not that kind of full-bore commitment to outright monetary tightening because they want to wait and see where is inflation going. There’s all these signs that the inflation cycle could be for real, but the central bank is not 100 per cent sure yet.

Marc Filippino
Ethan Wu writes our Unhedged newsletter. He also hosts our Unhedged podcast. We’ll have links to both of those things in our show notes. Thanks so much, Ethan.

Ethan Wu
Thanks for having me, Marc.

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Marc Filippino
China has been dealing with months of sluggish growth. The country just hasn’t rebounded from pandemic lockdowns the way a lot of people expected it to. And so China’s top leadership announced at this month’s politburo policymaking meeting that they’re going to step up measures to boost the economy.

Joe Leahy
This is not going to be the bazooka of the past when China ploughed billions and billions of renminbi into the economy and effectively propped up the entire global economy.

Marc Filippino
That’s Joe Leahy, the FT’s Beijing bureau chief.

Joe Leahy
We are going to see them taking very precise and well-targeted measures to sort of help certain sectors of the economy and try to get domestic demand back up so that they can meet their target for this year, which is 5 per cent.

Marc Filippino
Joe says that we could see more subsidies for consumer goods so that households might buy more. Beijing has also signalled a change of policy in a couple of key sectors, starting with the housing market.

Joe Leahy
It may be that now the top leaders see that the market is actually in the doldrums and they need to do something a little bit stronger to support it. And they abandoned Xi Jinping’s kind of catchphrase, which is that houses are for living in, not for speculation. He’s been wanting for a long time to deleverage that sector. But this time the politburo said the balance of supply and demand in the market has changed. And they dropped this slogan, this catchphrase from Xi, which was taken as very significant by the market.

Marc Filippino
The announcements gave a big boost to market sentiment on China, but Joe struck a note of caution.

Joe Leahy
We haven’t seen many figures behind all of this. We’re seeing a lot of signalling, but we’re not seeing a lot of money behind this, especially not a lot of new money. So we’re going to have to wait to see how much the party is willing to spend. They don’t want to rack up a huge amount of debt doing this. They’re very conscious that China’s debt is very high already, and they don’t want to raise that any further. But they will need to provide some sort of monetary incentive. They may cut interest rates, for instance. They may try to use monetary policy. They may also just sort of loosen the regulations to raise business confidence again. But they will need to come through with concrete measures or consumer and investor confidence will remain weak.

Marc Filippino
Joe Leahy is the FT’s Beijing bureau chief.

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It’s been really hot this summer. June was the hottest month on record globally, and now scientists think that July will beat that record. They say that heatwaves will become more frequent and more intense as the overall temperature of the globe gets hotter. As that becomes the new normal, a whole range of industries are trying to figure out how to adapt and change the way they do business. FT climate correspondent Attracta Mooney recently wrote about this. She joins me now. Hi, Attracta.

Attracta Mooney
Hi, Marc. How are you?

Marc Filippino
Yeah, I’m doing all right. A little hot. So Attracta, why would extreme heat or heatwaves affect the economy?

Attracta Mooney
It affects it for a variety of reasons. The first one is probably the most obvious one, and it’s that it affects productivity. When it’s hot, it is much harder to work. You know how lethargic you feel when it’s really hot. There’s some figures out there that we’re actually probably by 2030, you’re going to lose 2 per cent of working hours or around 2 per cent of working hours due to extreme heat. And that’s because it’s either too hot to work or our productivity slows down because it is so hot.

Marc Filippino
What industries are most affected? I have to imagine that they have to do with physical labour, like construction. You know, it’s dangerous to do strenuous work like that out in the heat.

Attracta Mooney
Exactly that. So construction and agriculture are among the most affected, and that’s because people are working outside. And they’re most affected in terms of productivity, but they are also quite badly affected in terms of how they operate. So construction, lots of the materials used in construction don’t work as well in extreme heat. And at the same time, agriculture has the same problems. Crops become affected by drought, and we lose yields and it is . . . costs quite a lot to the economy.

Marc Filippino
Are there measures in place to protect workers when there are these extreme heat events?

Attracta Mooney
Not exactly. Some countries have started to do work on setting maximum temperatures for when workers can be outside in extreme heat. But that’s actually very rare. And there’s some more calls for maybe more maximum temperatures to be set in different countries so that you don’t have this exposure for workers. But there are other measures people are looking at, for example, working through the night or very early in the morning so that you’re not working in the hottest part of the day. And they’re also looking at you trying to use cooling systems or covers to make it less hot for people to be out or be out in the heat.

Marc Filippino
Attracta, what’s your takeaway from this reporting? What stuck with you after working on this piece?

Attracta Mooney
I think the thing that stuck with me is that the amount of accidents that happen in extreme heat. It really increases dramatically. And that’s because our brains just don’t work as well when we’re really hot, and that’s across various sectors. So it affects people who are working on site but also affects people who are working indoors. We’re just all more prone to accidents and not doing our jobs as well.

Marc Filippino
Attracta Mooney is a climate correspondent for the FT. Thanks, Attracta.

Attracta Mooney
Thanks.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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