Panama Canal drought threatens US inflation, warn economists

Unnerved US economists and state officials have warned of imminent shipping bottlenecks and increased inflation for the US economy due to unprecedented levels of drought in the Panama Canal.

An inordinate decline in water levels at the Gatun Lake, which supplies the canal with fresh water, has resulted in spikes in surcharges and weight limits for vessels traversing the canal, reported Bloomberg.

Panama Canal Authority’s (PCA) administrator, Ricaurte Vásquez, reported that the canal experienced its driest May since 1950, meanwhile the PCA has projected a plummet in water levels to 78.2 feet by late July, ousting the previous record low of 78.3 in May 2016.

Should water levels continue to drop, the canal, which underwent an expansion to accommodate for larger vessels in 2016, may be forced to limit the daily number of vessels in transit from 36 to between 28 and 32, warned Vasquez.

The situation could be further aggravated with the arrival of the El Niño condition developing in the western Pacific Ocean, which is anticipated to disrupt normal weather patterns by the year’s end. Subsequently, the canal could see an increase in temperature and an intensified drought in 2024, reported Head of the canal’s Water Department, Erick Córdoba, in a recent interview.

In response, the PCA has implemented several measures to curtail the impact of the drought, while maintaining maritime operations in the canal. The PCA has cut the canal’s draft limit to 44.5 feet from its standard 50 feet requirement, with the limit set to drop again on 13 June to 44 feet.

Larger containerships will have to either reduce their container load or distribute their cargo among more ships.

Not only will this spike prices for consumer and industrial goods, but it could also stifle transported cargo by 40 per cent, according to Head of Ocean Freight at Flexport Inc., Nathan Strang.

Additionally, ocean carriers have began levying per-box container fees from 1 June to alleviate their own increased operational costs that accompanied the new draft limits.

Due to these constraints, logistics experts have predicted that shipping rates through the canal will ultimately rise while alternative routes from Asia to the US will be sought, reported Bloomberg.

The latest drought has left the Federal Reserve’s target of achieving a 2 per cent inflation rate in doubt, according to Economics Professor at Georgetown University and former International Monetary Fund Official, Jonathan Ostry.

While inflation rates have enjoyed a gradual decrease, currently sitting at 4.7 per cent, it yet remains “at a level that is very uncomfortable for central banks,” Ostry claimed.

Current forecasts for the Panama Canal reveal economic consequences that are beyond circumventing, according to experts, in spite of the PCA’s efforts to mitigate the droughts impact.

In April 2023, Konecranes delivered three Rubber-Tyred Gantry (RTG) cranes for the first time to PSA Panama.