Bank for International Settlements working paper links Brazilian drought shocks to 1–2 percentage points lower GDP growth through supply chains

The Bank for International Settlements published research on how climate-related physical risks affect economic activity in Brazil, finding that precipitation anomalies reduce municipal GDP growth and that the effects can propagate to other municipalities through supply chain connections. The analysis highlights that moderate anomalies, not only extreme events, account for much of the measured impact. Using a municipality-level drought and wet-spell measure based on the Standardized Precipitation Evapotranspiration Index (SPEI) and supply chain links proxied by confidential Banco Central do Brasil interfirm electronic funds transfers, the paper estimates that local dry spells cut contemporaneous GDP growth by more than 1 percentage point on average, while wet spells have smaller negative effects. Focusing on trade-linked municipalities that are geographically distant to limit common weather shocks, it finds that municipalities whose customer firms are in areas experiencing dry spells record 1–2 percentage points lower GDP growth, alongside weaker import growth and labour market outcomes. Sector results are heterogeneous: agriculture is most sensitive to both local and supply chain-transmitted shocks (including moderate ones), manufacturing responds mainly to intense supplier-side shocks, and services are affected primarily by local conditions. A counterfactual exercise attributes around 0.4 percentage points lower annual municipal growth on average over 2012–2019 to supply chain spillovers associated with climate change, with larger effects for some municipalities.