During a press breakfast on Wednesday morning, Bank of America Merrill Lynch’s economists and strategists scrambled to address the fact that Q1 GDP growth was slashed by far more than anyone expected.
But one long-term theme was confirmed: we can’t ignore the impact of extreme weather on the economy.
“We caution against reading too much into the weakness, as it is clear that special factors during the quarter distorted growth,” wrote BofA Merrill Lynch economist Ethan Harris later that afternoon. “The severe winter weather weighed heavily on consumption, fixed investment and trade.”
According to David Woo, Head of Global Rates and Currencies Research, weather can create a major shock to the FX markets.
Even though it’s almost July, the market has not been able to shake off the effects of this past winter. Not only was it the 3rd most severe winter since 1960, but it has also been the longest one.
Woo shared this chart of BAML’s proprietary extreme winter weather index:
Woo says that the winter of 2013-2014 is a temporary shock weighing on rates and has affected the poor numbers in Q1. Therefore, inference about future potential growth is unjustified.
He also added that there is a greater story of climate change. The winter of 2012-2013 was one of the warmest in U.S. history, but it was one of the coldest in Europe. On the flip side, 2013-2014 was one of the warmest in Europe, but one of the coldest in the U.S.
In his words, the poor weather is “punishing” the U.S. economy, while the European economy is “flowering” currently.
Who knows how positively or negatively the climate changes will affect the markets in the future.
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