Economics of extreme heat

Heat wave negatively changes consumption pattern

By Yoon Ja-young

The weather is one of the key factors that determine human behavior.

While there are beneficiaries and losers when the mercury shoots up, economists generally agree that the extreme heat works negatively on the economy.

Hongcheon in Gangwon Province recently saw the temperature rise to 41 degrees Celsius, the highest since 1904 when the country started compiling data.

As the Korea Meteorological Administration has forecast that the record heat will continue for a while, the market analysts are pondering how it will affect the economy.

They agree that heat wave is changing consumption patterns, overall negatively.

"Consumption increases in some sectors while others see a decline. When all things are added up, it seems the heat wave is a negative," said Ju Won, chief economist at Hyundai Research Institute.

A few beneficiaries

The first item that anyone can expect sales to surge amid a heat wave is air-conditioners.

According to electronics chain Lotte Hi-Mart, sales of air conditioners between July 23 and 29 soared 170 percent from a year ago. Dayou Winia, an air-conditioner manufacturer, closed at 3,650 won on the junior Kosdaq bourse on Aug. 2, which is up near 1,000 won from a month ago.

Sales of beverages and ice cream also rise. Ice cream sales of the country's major confectioneries such as Lotte, Binggrae and Haitai rose between 5 percent and 15 percent in June and July compared with a year ago.

The country's ice cream retail market has been contracting during the past few years due to competition from coffee shops and other luxury dessert shops coupled with the decreasing number of children, but it was saved by the record-heat this year.

Online shopping malls are also flourishing. Hypermarket chain E-mart saw online sales expand 16.5 percent between July 25 and 31 from last year, while offline sales rose 1.6 percent.

If people go out shopping, they just go to large shopping malls or department stores with good air-conditioning. Shinsegae Department Store had a sales surge of 11 percent between July 16 and 30 compared with a year ago as the first heat wave warning drove shoppers to look for places where they could stay cool.

Hyundai Department Store and Lotte Department Store also marked double digit sales growth despite the summer typically being the slow season.

While they are a few industries that typically grow during the heat, consumption is usually slow as people refrain from going out. Merchants at traditional markets as well as restaurants complain that they are going through their worst summer.

Cho Gyeong-lyeob, chief economist at the Korea Economic Research Institute, compared the record heat to the Middle East Respiratory Syndrome (MERS) which hit the country back in 2015. Consumer sentiment plummeted as people stayed at home, to limit potential exposure to the deadly disease.

"When MERS swept the country, people avoided going out. Consumption decreased and they didn't even travel. Extreme heat will decrease overall spending," he said.

"When economic activities slow down due to the weather, it is difficult to come up with proper stimulus measures," he added.

While summer is spending season for Koreans who go to beaches or mountains for vacation, too much heat seems to be destroying this mechanism. Daecheon Beach in Boryeong, South Chungcheong Province, had 410,000 visitors in July, which is half of last year.

"When it is too hot, vacationers will stay in their lodgings even when they go on vacation," Ju said, pointing out that the services industry will not benefit from the vacation season as much as usual.

Extreme heat negatively affects production as well. The finance ministry issued guidelines on construction work ordered by the government and state-run entities, according to which construction work should stop in cases of extreme heat. The measure aims at preventing accidents or casualties.

"Even if the work goes on, productivity falls notably when the mercury shoots up. It is difficult to exactly calculate how much the heat wave hurts productivity though," Cho said.

Shipbuilders have already shortened work hours as much of the work is done outdoors. Construction and steel companies are also expecting a decrease in workdays. The unusual heat is feared to pull down the operation rate of manufacturers, negatively affecting economic indices.

Pulling up inflation

The extreme heat also worsens inflation by pulling up prices of agricultural produce.

"The summers that have had unusual heat waves saw inflation worsen in both absolute and relative terms," said Baik Da-mi, a researcher at Hyundai Research Institute, in a report.

She analyzed July and August inflation figures of each summer since 1990. While the five hottest summers during the period saw average inflation of 5.6 percent, the other summers had a lower figure at 3.5 percent. Inflation of those unusually hot summers was also 0.6 percentage points higher than the annual average.

She said the government should take measures as heat waves add to the burden on households. These include expanding storage systems and developing crops that are resistant to weather changes, on top of securing supply sources overseas.

"Not only the extreme heat but other disasters triggered by climate change, such as typhoons, drought and heavy snow are surging. It is crucial to upgrade weather forecasts and set up comprehensive risk management systems as those previously deemed unusual are becoming the norm."