Heatwaves and waterways

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0:56people of the internet something wild just happened i was out getting my lunch from the posh salad place up the road and droplets fell from the sky all around and indeed upon me i gather these droplets are known as rain now i know it's boring when brits bang on about the weather but it really has been a furnace in London over the summer. We're just now getting the first rain showers in the best part of two months. We're banned from using hosepipes, gardens and crops are dying, lakes are drying up, the whole thing. The thing is, this is not just like a Brit chit-chat thing. There's also been a serious drought across continental Europe too, and it matters.

1:40The Rhine River, a major logistical artery in Germany, has in some places almost disappeared. Economists and investors are being forced to take this seriously. Today on the show, weathernomics. How do we cope economically with these bouts of heat? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist down in the bunker of FT Towers in London. And joining me down the line from Frankfurt in Germany, making his unhedged debut, is the FT's Olaf Storbeck, who's here to give us the lowdown. Olaf, thanks for coming on. Hi, thanks for having me.

2:22So, obviously, Brits bang on about the weather, but what's it been like in Germany this summer? It was really incredibly hot, in particular in June, when we had this two weeks of 36 whatever degrees. And at night, it didn't really feel below 30, which was kind of really cruel. And the humidity was very high, so you couldn't even sweat properly. And fortunately, we were on holiday. I was on holiday for a large part of it. But we came back and the last weekend literally felt like the pandemic. We were hunkering down in our flat, sitting in underwear in front of a ventilator, which obviously I didn't do during the pandemic.

3:05But you couldn't go outside and you just couldn't do anything. And so those temperatures for Americans listening, that's well into the hundreds, isn't it? Like, it's seriously hot. So like the sort of competing ways of looking at this in the UK, some people are like, oh, it's fantastic. all this lovely sunny weather, it's going to be great for our sparkling wine. And there's a bunch of us who are just like, what the hell are you talking about? This is just unpleasant. But also it is like literally damaging economically. I mean, how much is that cutting through in Germany now? How big of an issue is that?

3:37Well, the full impact is still difficult to define, of course, because it's still ongoing. There's a precedent in 2018. there was a similar draw where domestic shipping was kind of impaired quite significantly. And there are estimates that it kind of knocked out, wiped out 0.4 % of GDP in that year. So it's kind of quite a meaningful impact. And just today, we had a warning from Bundesbank, which said that... So that's your central bank there. The central bank, which warned that supply chains will be disrupted. and it will have a meaningful impact on industrial production. They don't put a number, they didn't put a number to that.

4:22Oxford Economics, I think, estimated that it could kind of wipe out 0.2 percentage points of GDP growth in the third quarter. But it is kind of, for the wider economy, it is meaningful, and for some kind of particular sectors, it's quite brutal. Yeah, so let's talk about the Rhine River. So the Rhine, it sort of, it cuts in at the Netherlands, right, and goes in through Rotterdam, I believe, cuts right the way through the Netherlands and then it kind of kicks south. Well, it's the other way around, to be honest, right? It starts in Switzerland. Well, it flows the other way. It starts in Switzerland, goes through the Lake Constant and then goes kind of north-south through kind of almost the length of Germany and then goes into the Netherlands and into the North Sea.

5:10And then flows into the sea. And the reason why it's important economically is that that links up industrial Germany with those ports on the North Sea. So I gather from all of our wonderful reporting on this that this is just like a really important form of transport for barges that carry heavy, low-value stuff like chemicals and iron ore and coal and construction materials. They all head along this river. So Olaf, what are we dealing with here, right? The Rhine is a mighty river. How much has it dried up? Yeah, so at the narrowest point, the water level has fallen to about a metre now, significantly below what we would normally see.

6:00So normally the depth is about 1.90m. Other sections, it's 210. So yeah, it's fallen dramatically. And just when you're there, right, you're looking at the river, If you know the river well, does it look different? It does look different. It's still there. It's still quite wide. But it looks like it has a sand beach at that part where I was last weekend. It really looked like a sand beach on the other shore because it's kind of much narrower. But there's a point in the river that people keep referring to. Maybe you can explain why to me. It's called Kaub or Kaub. I don't know how you pronounce it.

6:40Yeah, I mean, it's called Kaub. In the area around Kaup, the navigation channel is 20 centimetres more shallow than in the rest of the Rhine. And the really interesting and shocking thing we did a story about this last week is deepening that section has been discussed for ages. It's been in a federal... Yeah, why has that not happened, right? They must be kicking themselves, the authorities, think, why don't we just sort this out? Yes, it's really kind of mind-blowing. So it's been in the federal kind of planning for major transportways since 1992, so for 34 years. After the 2018 drought, this was kind of given higher priority.

7:26Then they thought, okay, we might be done by 2030. Now the current plan is 2033. and I mean at least they've now started the actual planning procedures. So is the river now effectively cut in two like it's got a north section and a south section or is it still fully navigable and like how are companies getting around this because I gather like it's not like necessarily ships can't get along and barges can't get along this river at all but they have to carry a lot less stuff so they're a lot less heavy which just means you You need a lot more barges, which just means all of your transportation costs as a company go up.

8:08And it's just a pain in the ass and an expensive pain in the ass. So, like, what are companies doing to get around all this? I mean, it's not that the river has completely disappeared. It's kind of much narrower. It's difficult for ships to go through and it's causing problems for shipping. And at the moment, barges, experts say barges can only take about a third of the overall load. And the other number which is interesting is that because why is everyone talking about the Rhine, not the Danube and other rivers which are also affected? It's because the Rhine accounts for 80 % of all the domestic shipping in Germany.

8:48So it's really the main waterway. And I gather one of the ways that the authorities have tried to get around this is that they have suspended a Sunday truck ban. First of all, I love that a Sunday truck ban is a thing. You just clear like lorries off the road on a Sunday as a matter of course. But they've had to soften those rules, haven't they, just to help ease the congestion? Yes, this was quite a controversial decision. environmentalists say it doesn't really help. The shipping industry and the chemical industry also says, well, you can't, particularly in short term, replace those bike transport on barges with lorries because the number of lorries you need needed and the number of drivers is just insane.

9:40And also, even if you get rid of the Sunday driving ban, you have very tightly regulated hours of driving. Lorry drivers are allowed to do before they can do. They have to have an enforced rest. So, I mean, it does help, but I would expect the main perception is that it's more of a rounding error than really kind of sorting it out. What do companies do? I mean, after this 2018 crisis, companies like BASF, this chemical giant kind of south of Frankfurt, they did a lot of research with shipyards and also invested in new ships, which are more specifically designed for low water levels and can operate at much lower levels.

10:31I mean, also, obviously, this can only go so far because you do need some water. So as you were saying earlier, like quite a few banks and whatnot have cut their growth forecasts for Germany for this year, specifically because of what's going on with the Rhine. So the German central bank had penciled in growth of about 0.5 % for 2026. So you don't have a huge amount of wiggle room. And now like ING, for example, the Dutch bank reckons it could lop 0.3 percentage points off that. That's a lot. Like you're really taking out a large part of the growth that have been anticipated for Germany for the whole of this year just because of this one river.

11:13I mean, it's kind of amazing, isn't it? And it just sort of tells you that, you know, it's all well and good to think of like climate change or think of like extreme weather events in a sort of very abstract sense. But they have a very real impact on economies here and now. I mean, is that really sinking in in Germany, do you think? Yes, it is. But I think it's kind of people on the streets don't really notice the impact from the Ryan crisis. Unless maybe they work at BASF and they're at Organs or whatever. But I think the heat wave and this really extended period of tropical heat and temperatures like you would normally expect maybe in Rome, but not in Frankfurt.

12:00But this has really had a big impact on people's mind. And the other thing is food prices, right? You know, I was reading some analysis from Barclays, I think it was earlier this week, about like food price inflation has already kicked up pretty rapidly. And, you know, we're going to get more of the same. This is where you start to see climate change really kind of really poke through in the economic system. It's through stuff like that. There were warnings from some German farmers which are basically expecting a complete loss of their harvest because of the drought. And it's quite a dramatic situation for them.

12:37So what I mean, you know, you're German, you follow German politics very closely. Do you think this whole event, this whole thing has been shocking enough to really force some change around deepening the river and thinking about how to mitigate for climate change and thinking about how to do things differently so that we don't all get stuck in a hole the next time there's a heat wave. Because the other part of this is, as you say, the last really serious incident along these lines in Germany was in 2018. But pretty much every year, every summer is hot, hot, hot in parts of Europe that were not previously hot, hot, hot, you know, like London, like Frankfurt.

13:14We've got to change stuff. And do you feel like the German government has, you know, this is enough of a kick up the bum to make them really change? That's a tough question, probably not, to be honest. Because I think in October or in September, it will all be forgotten. And I talked to a few people when doing reporting for the story about kind of this 34-year delay in deepening the COP section. And one of the MPs who in 2019 filed this motion to speed things up, he told me and he's kind of an expert in in transport and domestic shipping um he told me oh we've been talking about this all the time when there was a drought and then kind of once summer has gone as soon as it starts raining everyone forgets about it yeah um so i don't know i mean the other thing is i haven't really looked into the details and i didn't kind of make my own opinion about this but the shipping lobby argues that what you really need in the long term is water management on the Rhine so apparently and I wasn't aware of this there's only one lock on the entire length of the Rhine which basically means that all the water that goes in anywhere immediately basically drains into the North Sea right and obviously if it doesn't rain for three months, that's kind of an issue.

14:40And it's not a surprise that you have low water levels. Obviously, this comes with other environmental concerns. And I guess it's not a very straightforward decision. But I find the argument in itself, without being aware of all the potential side effects, quite plausible that this is probably a thing you need to think about. Another thing which I do, there are also some scientists in the news, I haven't talked to them myself, who basically say with the melting glaciers in the Alps, the problem will only get worse over the next 10, 15, 20 years, because apparently in summer, the melting water coming from the glaciers is an important feeder of river levels.

15:26And if you don't have any glaciers in the Alps anymore, this source of water supply for the rivers isn't there anymore and will make or could make the problem even worse. Yeah, the mighty Rhine has been somewhat humbled. Olaf, thanks for filling us in on all that. We are going to be back in just one sec with Long Short.

15:57Already it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Olaf in Frankfurt, what are you saying? Well, I think I still, despite all our chat about the heatwave and the draw, I definitely go short on winter. You're not allowed, you have to be pro-winter after the whole conversation we just had. But fine, I'll allow it. It's basically the days with only eight hours of daylight and too much rain. All right, fair enough. I'll let you have it. I am going to have to be short bonds. They've been having a bad time lately. Prices falling, borrowing costs rising.

16:40So this week, the US Treasury Department said it was going to buy back a load of bonds, much more than usual. Clearly, its patience with this is running out. but the market is not playing ball. So it's shaping up to be a bit of a battle here. My money is on the bond vigilantes. So I'm short bonds. We'll no doubt talk more about this next week. Olaf Storbeck in Frankfurt. Thank you so much for filling us in. Hope you come back again soon. Listeners, we will be back on Tuesday. So please don't shrivel up and listen up then.

17:23We'll be right back.