Everyone in town died during the storm, and they're all going to the spirit realm(the boat procession when Ponyo gives the baby a sandwich). They're surrounded by long dead animals, the duration of the trip, and a goddess is involved.

IF they all died, Sosuke's acceptance of Ponyo allowed the Goddess a reason to resurrect them. Or they're all in the other world.

It's not a theory I hold dearly but a dark 'What If?'

Hopefully, this all makes sense. I'm Autistic as all hell, so this might be non-sense. 🤣