Economic impacts of droughts on track to intensify, OECD says
Global economic losses from droughts are set to worsen as climate change exacerbates dry spells, an OECD report has said.
As droughts become more frequent and severe, their economic impacts are intensifying, according to the OECD's 2025 Global Drought Outlook. The average drought today can bring on economic impacts up to six times greater than in 2000, it found.
Without strong climate change mitigation and prevention policies, the OECD has warned that extreme dry spells will have a growing impact on the global economy.
“Co-ordinated policy action across levels of government, sectors and countries is needed to respond to growing drought risks and mitigate impacts on food security, health, energy, transport, agriculture, peace and security,” OECD secretary-general Mathias Cormann said.
“Practical solutions to sustainably manage water, ecosystems and land can reduce vulnerability, enhance preparedness and mitigate the economic impacts of droughts.”
Climate change is set to worsen extreme weather events, including droughts, cyclones, and floods, according to evidence collated by the Intergovernmental Panel on Climate Change.
The global land area affected by drought has doubled in the last 120 years, the OECD said. Almost half (40 per cent) of the planet has experienced more frequent and intense droughts in recent decades.
As droughts intensify, their multifaceted economic impacts are set to grow. The average drought in 2035 is projected to cost at least 35 per cent more than it would today, the report said, and possibly up to 110 per cent more.
Crop yields fall by up to 22 per cent in particularly dry years, while a doubling of drought duration could reduce the production of essential products like corn and soy by up to 10 per cent, the OECD found.
Water scarcity can also negatively impact trade channels, the report said. When important river systems dry up, such as the Amazon in South America, the Rhine in Europe and the Mississippi River in North America, maritime economies can stall.
Between December 2021 and January 2024, severe drought conditions affecting the Panama Canal – one of the world’s most critical trade routes – forced local authorities to restrict ship transit and cargo volumes, causing a 49 per cent reduction in monthly traffic.
Industries that rely on water for production, cooling or transportation are also impacted by water scarcity, such as AI, which uses extensive amounts of water to cool its servers.
Researchers estimate that ChatGPT consumes 500mL of water, two full cups, for every five to 50 prompts.
Severe droughts can also reduce hydroelectric energy production by over 25 per cent, negatively impacting supply chains and energy availability, the OECD said.
A significant reduction in annual rainfall (one standard deviation) could halve a region’s GDP growth rate, the report found. A permanent rainfall deficit could lead an economy to have a 30 per cent lower GDP by 2050, in comparison to normal conditions.
Australia was singled out by the OECD as one of the countries that would face severe droughts more frequently by 2050 and 2100 under a moderate emissions scenario, necessitating better adaptation strategies.
The report applauded Australia’s existing drought mitigation strategies, including the adoption of water recycling, water-efficient household technology and comprehensive water management frameworks. However, it noted that climate change mitigation remains the most important and effective strategy to minimise drought risks.
“Delivering on the 1.5°C pathway through sound climate change mitigation strategies is now more critical than ever,” the OECD said.
“Climate change mitigation efforts remain crucial to preventing the worsening of drought conditions. A growing body of scientific evidence shows that keeping atmospheric warming below 1.5°C above preindustrial levels would significantly reduce the risk of extreme drought.”
Australian insurers have called on policymakers to implement stronger climate mitigation and adaptation strategies as more frequent natural disasters place heavier burdens on the insurance system.
In 2025 alone, data from the Insurance Council of Australia showed that insured losses had climbed to almost $1.5 billion by mid-May, after over 126,000 claims were filed.
“Insurers have been calling on governments to invest more in resilience and mitigation to protect the many Australians who are living in harm’s way and improve insurance affordability and availability,” the ICA said.
The OECD found that every dollar invested in drought resilience could yield up to ten dollars in economic returns, underscoring the importance of mitigation strategies as climate change intensifies.
“As drought risks intensify, proactive and co-ordinated action is essential to build resilience and adapt to climate change,” the OECD said.
“With the right policies and investments, governments can reduce the immediate impacts of drought while also delivering long-term returns.”
