̽��ֱ�� of Cambridge - macroeconomic

̽��ֱ��price of ecological breakdown

fpjl2 — Mon, 07 Oct 2024 23:00:00 +0000

Cambridge researchers are investigating the economic consequences of climate change and biodiversity loss, and identifying ways to drive a more sustainable global economy.

No country ‘immune’ to COVID-19 economic shock, but Asian nations will bounce back faster

fpjl2 — Wed, 02 Dec 2020 10:25:22 +0000

Global GDP will drop three percent below pre-pandemic estimates by the end of 2021, with many Western nations seeing "deeper and longer-lasting" effects compared to China and other Asian economies, a study suggests.

Moreover, nations that adopted less stringent lockdowns – Sweden, for example – will not be shielded from the economic losses of COVID-19, owing to spillovers from other countries.

Published by the National Bureau of Economic Research, the macroeconomic study captures the economic volatility caused by the last 40 years of "rare events". It uses this historical data to forecast the longer term effects of the pandemic on individual economies.

̽��ֱ��research suggests that economic growth will be stymied in at least 80% of the world’s advanced nations and many emerging market economies due to 'excess global uncertainty'.

Two Cambridge economists conducted the study with an international team of researchers. They argue that the pandemic will lead to a "significant fall in world output" – the consequences of which could last much of the dawning decade.

“ ̽��ֱ��COVID-19 pandemic is a global shock like no other, involving simultaneous disruptions to both supply and demand in an interconnected world economy,” said co-author Dr Kamiar Mohaddes, a Cambridge Judge Business School economist.

“Infections reduce labour supply and productivity, while lockdowns, business closures, and social distancing also cause supply disruptions. On the demand side, redundancy and the loss of income from death, quarantines, and unemployment plus worsened economic prospects reduce household consumption and firms’ investment.”

̽��ֱ��study from Mohaddes, a Fellow of King’s College at Cambridge, and colleagues, including M Hashem Pesaran, Fellow of Trinity College, uses the IMF’s GDP growth forecast revisions between January and April 2020 to identify the COVID-19 economic shock.

̽��ֱ��research team created a model of 33 countries covering 90% of the global economy, using data from 1979 onwards – in particular the rare economic shocks – to predict the range of GDP loss likely to be suffered by each nation and region as a result of the pandemic. ̽��ֱ��study accounts for the "nonlinear" effects of global economic volatility.

“ ̽��ֱ��techniques developed in this study are intended to capture the effects of rare events such as COVID-19, and account for interconnections and spillovers between countries and markets,” said Mohaddes, who worked with colleagues from the International Monetary Fund, Johns Hopkins ̽��ֱ�� and the Federal Reserve Bank of Dallas.

̽��ֱ��study suggests that the US and the UK are likely to experience deeper and longer-lasting effects, while China has more than a 50% chance of its economy improving far quicker than its major western counterparts. ̽��ֱ��odds for the Euro area are 'skewed negatively', but it’s likely to experience a speedier and sturdier recovery than the US by the end of 2021.

“Pulled by China, most of the emerging economies in Asia have a higher chance of performing better than the global average,” said Mohaddes. He argues that China and others in the region may fare better globally thanks to their manufacturing bases.

Economies with strong service industries have proved resilient in the past as manufacturing was more exposed to market fluctuations, but COVID-19 and the digital age have turned this on its head: services suffer as people stay at home en masse while goods are still traded through online platforms.

“Non-Asian emerging markets stand out for their vulnerability, and will suffer from a significant output collapse in 2020, with a less than 30% chance of not experiencing an output loss by the end of 2021. Turkey, South Africa, and Saudi Arabia will almost certainly see at least eight quarters of severely depressed economic activity,” Mohaddes said.

̽��ֱ��study pays close attention to Mohaddes’ home nation of Sweden, where the government took a markedly different approach, with little in the way of the mandatory social distancing and lockdowns adopted by most countries.

“ ̽��ֱ��Swedish economy will also see a large fall in GDP, very similar to other European economies,” he said. “Our estimates for Sweden illustrate that no country is immune to the economic fallout of the pandemic, because of interconnections and the global nature of the shock.”

̽��ֱ��study predicts lower interest rates in core advanced economies – about 100 basis points or 1 percentage point below pre-COVID rates. “ ̽��ֱ��crisis raises precautionary savings and dampens investment demand,” said Mohaddes.

However, he warns that the same cannot be said with certainty about emerging market economies in regions such as Latin America, where borrowing rates can increase rapidly, with implications for "debt servicing".

̽��ֱ��study’s calculations involve both the 'temporal and cross-sectional dimensions' of data that take into account real and financial drivers of economic activity, as well as common factors such as oil prices and global volatility. Country-specific models include output growth, the real exchange rate, as well as real equity prices and long-term interest rates when available.

Added Mohaddes: “Given its unprecedented nature, any analysis of COVID-19 has to go beyond identifying the economic shock and account for its non-linear effects and cross-country spillovers, as well as the uncertainty surrounding forecasts. This is what we address with our econometric model.”

Study uses 40 years of quarterly data to forecast a lengthy global recession resulting from coronavirus, with the manufacturing bases of China and East Asia predicted to fare better than most Western economies.

Any analysis of COVID-19 has to go beyond identifying the economic shock and account for its non-linear effects and cross-country spillovers

Kamiar Mohaddes

Gary Butterfield

A lone walker in a shopping district of Leeds, UK, during lockdown.

̽��ֱ��text in this work is licensed under a Creative Commons Attribution 4.0 International License. Images, including our videos, are Copyright © ̽��ֱ�� of Cambridge and licensors/contributors as identified. All rights reserved. We make our image and video content available in a number of ways – as here, on our main website under its Terms and conditions, and on a range of channels including social media that permit your use and sharing of our content under their respective Terms.

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Globalised economy making water, energy and land insecurity worse: study

sc604 — Mon, 26 Oct 2020 00:54:35 +0000

Countries meet their needs for goods and services through domestic production and international trade. As a result, countries place pressures on natural resources both within and beyond their borders.

Researchers from the ̽��ֱ�� of Cambridge used macroeconomic data to quantify these pressures. They found that the vast majority of countries and industrial sectors are highly exposed both directly, via domestic production, and indirectly, via imports, to over-exploited and insecure water, energy and land resources. However, the researchers found that the greatest resource risk is due to international trade, mainly from remote countries.

̽��ֱ��researchers are calling for an urgent enquiry into the scale and source of consumed goods and services, both in individual countries and globally, as economies seek to rebuild in the wake of COVID-19. Their study, published in the journal Global Environmental Change, also invites critical reflection on whether globalisation is compatible with achieving sustainable and resilient supply chains.

Over the past several decades, the worldwide economy has become highly interconnected through globalisation: it is now not uncommon for each component of a particular product to originate from a different country. Globalisation allows companies to make their products almost anywhere in the world in order to keep costs down.

Many mainstream economists argue this offers countries a source of competitive advantage and growth potential. However, many nations impose demands on already stressed resources in other countries in order to satisfy their own high levels of consumption.

This interconnectedness also increases the amount of risk at each step of a global supply chain. For example, the UK imports 50% of its food. A drought, flood or other severe weather event in another country puts these food imports at risk.

Now, the researchers have quantified the global water, land and energy use of 189 countries and shown that countries which are highly dependent on trade are potentially more at risk from resource insecurity, especially as climate change continues to accelerate and severe weather events such as droughts and floods become more common.

“There has been plenty of research comparing countries in terms of their water, energy and land footprints, but what hasn’t been studied is the scale and source of their risks,” said Dr Oliver Taherzadeh, who led the research while a PhD student in Cambridge’s Department of Geography. “We found that the role of trade has been massively underplayed as a source of resource insecurity – it’s actually a bigger source of risk than domestic production.”

To date, resource use studies have been limited to certain regions or sectors, which prevents a systematic overview of resource pressures and their source. This study offers a flexible approach to examining pressures across the system at various geographical and sectoral scales.

“This type of analysis hasn’t been carried out for a large number of countries before,” said Taherzadeh. “By quantifying the pressures that our consumption places on water, energy and land resources in far-off corners of the world, we can also determine how much risk is built into our interconnected world.”

̽��ֱ��authors of the study linked indices designed to capture insecure water, energy, and land resource use, to a global trade model in order to examine the scale and sources of national resource insecurity from domestic production and imports.

Countries with large economies, such as the US, China and Japan, are highly exposed to water shortages outside their borders due to their volume of international trade. However, many countries in sub-Saharan Africa, such as Kenya, actually face far less risk as they are not as heavily networked in the global economy and are relatively self-sufficient in food production.

In addition to country-level data, the researchers also examined the risks associated with specific sectors. Surprisingly, one of the sectors identified in Taherzadeh’s wider research that had the most high risk water and land use – among the top 1% of nearly 15,000 sectors analysed – was dog and cat food manufacturing in the USA, due to its high demand for animal products.

“COVID-19 has shown just how poorly-prepared governments and businesses are for a global crisis,” said Taherzadeh. “But however bad the direct and indirect consequences of COVID-19 have been, climate breakdown, biodiversity collapse and resource insecurity are far less predictable problems to manage – and the potential consequences are far more severe. If the ‘green economic recovery’ is to respond to these challenges, we need radically rethink the scale and source of consumption.”

Reference:
Oliver Taherzadeh et al. ‘Water, energy and land insecurity in global supply chains.’ Global Environmental Change (2020). DOI: 10.1016/j.gloenvcha.2020.102158

̽��ֱ��first large-scale study of the risks that countries face from dependence on water, energy and land resources has found that globalisation may be decreasing, rather than increasing, the security of global supply chains.

By quantifying the pressures that our consumption places on water, energy and land resources in far-off corners of the world, we can also determine how much risk is built into our interconnected world

Oliver Taherzadeh

WxMom

Iowa County Drought

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Economic damage could be worse without lockdown and social distancing – study

fpjl2 — Wed, 29 Apr 2020 08:21:57 +0000

There is much debate over the economic costs of our lockdown lives: whether the mitigation of disease spread is worth the deepening financial crisis.

New research from the ̽��ֱ�� of Cambridge suggests that there is no absolute trade-off between the economy and human health – and that the price of inaction could be twice as high as that of a 'structured lockdown'.

A Cambridge economist, together with researchers at the US Federal Reserve Board, has combined macroeconomics with aspects of epidemiology to develop a model for the economic consequences of social distancing.

̽��ֱ��study uses US economic and population data, but the researchers say their findings have implications for most developed economies.

It divides the working population into 'core workers' – those in healthcare as well as food and transportation, sanitation and energy supply, among others – and then everyone else, and models the spread of the virus if no action is taken.

“Without public health restrictions, the random spread of the disease will inevitably hit sectors and industries that are essential for the economy to run,” said co-author Prof Giancarlo Corsetti, from Cambridge’s Faculty of Economics.

“Labour shortfalls among core workers in particular strip more value from the economy. As essential team members within this core sector drop out of the workforce, it impairs production far more than losing those in other areas of the economy.”

By separating the core and non-core workers, the study suggests that the economy would shrink by 30% or more without lockdown and social distancing. “By ignoring this division in the workforce, we may badly underestimate the true depth of economic damage,” Corsetti said.

Using data from the US Bureau of Labour Statistics, the researchers then quantified the share of workers who could 'reasonably keep performing occupational tasks at home': 15% of those in core sectors, and 40% of everyone else currently working – along with 30% of all non-working age people, from children to the retired. This puts a third of the entire population on lockdown.

In this scenario, the infection curve is smoothed out through social distancing, and the rate of loss in economic output is around 15%, just half the level of damage if no action is taken to prevent disease spread.

Sickness rates for core workers would be the same as the rest of the population, the high levels of social distancing elsewhere act as a shield.

“This overarching policy flattens the curve,” said Corsetti. “ ̽��ֱ��peak of the infected share of the population drops from 40% to about 15%. However, this is still far too high given the capacities of healthcare systems.”

So the researchers also modelled a scenario where infection rates are kept to a manageable level for healthcare services of under 1.5% of the population for 18 months – the length of time many believe it will take for a vaccine to arrive.

This would mean lockdown shares of 25% of core workers, 60% of workers outside of core, and 47% of non-working age people. Under this scenario, the economy contracts by 20%.

̽��ֱ��study also looked at a very strict lockdown – 40% of core workers and 90% each of non-working age and everyone else – that lasts for just three months. Such a scenario simply delays the infection rates but prevents 'herd immunity', creating an economic drop comparable to that of taking no action in the first place.

“As well as containing the loss of life, committing to long-term social distancing structured to keep core workers active can significantly smooth the economic costs of the disease,” said Corsetti.

“ ̽��ֱ��more we can target lockdown policies toward sections of the population who are not active in the labour market, or who work outside of the core sector, the greater the benefit to the economy,” he said.

“What seems clear to us is that taking no action is unacceptable from public health perspective, and extremely risky from an economic perspective.”

However, Corsetti and colleagues caution that the lingering uncertainties around just how the coronavirus spreads means their scenarios are not forecasts, but should be taken as a 'blueprint' for further analysis.

̽��ֱ��research is published as a Cambridge-INET working paper [PDF].

̽��ֱ��Cambridge-INET Institute has a dedicated website for research relating to the pandemic: covid.econ.cam.ac.uk.

How you can support Cambridge's COVID-19 research effort

Donate to support COVID-19 research at Cambridge

̽��ֱ��worst thing for the economy would be not acting at all to prevent disease spread, followed by too short a lockdown, according to research based on US data.

Taking no action is unacceptable from public health perspective, and extremely risky from an economic perspective

Giancarlo Corsetti

White House

A reporter takes a photo of Donald Trump during a White House coronavirus briefing in April

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Climate change to shrink economies of rich, poor, hot and cold countries alike unless Paris Agreement holds

fpjl2 — Mon, 19 Aug 2019 09:18:05 +0000

Prevailing economic research anticipates the burden of climate change falling on hot or poor nations. Some predict that cooler or wealthier economies will be unaffected or even see benefits from higher temperatures.

However, a new study co-authored by researchers from the ̽��ֱ�� of Cambridge suggests that virtually all countries – whether rich or poor, hot or cold – will suffer economically by 2100 if the current trajectory of carbon emissions is maintained.

In fact, the research published on Monday by the National Bureau of Economic Research suggests that – on average – richer, colder countries would lose as much income to climate change as poorer, hotter nations.

Under a “business as usual” emissions scenario, average global temperatures are projected to rise over four degrees Celsius by the end of the century. This would cause the United States to lose 10.5% of its GDP by 2100 – a substantial economic hit, say researchers.

Canada, which some claim will benefit economically from temperature increase, would lose over 13% of its income by 2100. ̽��ֱ��research shows that keeping to the Paris Agreement limits the losses of both North American nations to under 2% of GDP.

Researchers say that 7% of global GDP is likely to vanish by the end of the century unless “action is taken”. Japan, India and New Zealand lose 10% of their income. Switzerland is likely to have an economy that is 12% smaller by 2100. Russia would be shorn of 9% of its GDP, with the UK down by 4%.

̽��ֱ��team behind the study argue that it isn’t just about the number on the thermometer, but the deviation of temperature from its “historical norm” – the climate conditions to which countries are accustomed – that determines the size of income loss.

“Whether cold snaps or heat waves, droughts, floods or natural disasters, all deviations of climate conditions from their historical norms have adverse economic effects,” said Dr Kamiar Mohaddes, a co-author of the study from Cambridge’s Faculty of Economics.

“Without mitigation and adaptation policies, many countries are likely to experience sustained temperature increases relative to historical norms and suffer major income losses as a result. This holds for both rich and poor countries as well as hot and cold regions.”

“Canada is warming up twice as fast as rest of the world. There are risks to its physical infrastructure, coastal and northern communities, human health and wellness, ecosystems and fisheries – all of which has a cost,” he said.

“ ̽��ֱ��UK recently had its hottest day on record. Train tracks buckled, roads melted, and thousands were stranded because it was out of the norm. Such events take an economic toll, and will only become more frequent and severe without policies to address the threats of climate change.”

Mohaddes worked on the study with Cambridge PhD candidate Ryan Ng, as well as colleagues from the ̽��ֱ�� of Southern California, USA, Johns Hopkins ̽��ֱ��, USA, National Tsing Hua ̽��ֱ��, Taiwan, and the International Monetary Fund.

Using data from 174 countries dating back to 1960, the research team estimated the link between above-the-norm temperatures and income levels. They then modelled the income effects under a continuation of business-as-usual emissions as well as a scenario in which the world “gets its act together” and holds to the Paris Agreement.

Researchers acknowledge that economies will adapt to changing climates, but argue that their modelling work shows adaptation alone will not be enough.

̽��ֱ��scientific consensus suggests that adapting to climate change takes an average of 30 years, as everything from infrastructure to cultural practice slowly adjusts. But even if this adjustment speeds up to just 20 years, the United States still loses almost 7% of its economy, with over 4% of global GDP gone by the century’s end.

̽��ֱ��team also undertook a more focused approach to the U.S. to gauge the strength of their results. “Cross-country studies are important for the big picture, but averaging data at national levels leads to loss of information in geographically-diverse nations, such as Brazil, China or the United States,” said Mohaddes.

“By concentrating on the U.S., we were able to compare whether economic activity in hot or wet areas responds to temperature fluctuations around historical norms in the same way as that in cold or dry areas within a single large nation.”

They looked at ten sectors ranging from manufacturing and services to retail and wholesale trade across 48 U.S. states, and found each sector in every state suffered economically from at least one aspect of climate change – whether heat, flood, drought or freeze.

When scaled up, these are the effects that will create economic losses at the national and global levels, even in advanced and allegedly resilient economies, say the researchers.

“ ̽��ֱ��economics of climate change stretch far beyond the impact on growing crops,” said Mohaddes. “Heavy rainfall prevents mountain access for mining and affects commodity prices. Cold snaps raise heating bills and high street spending drops. Heatwaves cause transport networks to shut down. All these things add up.”

“ ̽��ֱ��idea that rich, temperate nations are economically immune to climate change, or could even double and triple their wealth as a result, just seems implausible.”

Mohaddes is from Sweden, which some predict will benefit from higher temperatures. “But what about the winter sports depended upon by the Swedish tourism industry?”

“If advanced nations want to avoid major economic damage in the coming decades, the Paris Agreement is a good start.”

A bold response to the world’s greatest challenge
̽��ֱ�� ̽��ֱ�� of Cambridge is building on its existing research and launching an ambitious new environment and climate change initiative. Cambridge Zero is not just about developing greener technologies. It will harness the full power of the ̽��ֱ��’s research and policy expertise, developing solutions that work for our lives, our society and our biosphere.

Study suggests that 7% of global GDP will disappear by 2100 as a result of business-as-usual carbon emissions, including over 10% of incomes in both Canada and the United States.

If advanced nations want to avoid major economic damage in the coming decades, the Paris Agreement is a good start

Kamiar Mohaddes

NPS Climate Change Response Follow

Wildfire

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‘Carbon bubble’ coming that could wipe trillions from the global economy – study

fpjl2 — Mon, 04 Jun 2018 12:06:33 +0000

Fossil fuel stocks have long been a safe financial bet. With price rises projected until 2040* and governments prevaricating or rowing back on the Paris Agreement, investor confidence is set to remain high.

However, new research suggests that the momentum behind technological change in the global power and transportation sectors will lead to a dramatic decline in demand for fossil fuels in the near future.

̽��ֱ��study indicates that this will now happen regardless of apparent market certainty or the adoption of climate policies – or lack thereof – by major nations.

Detailed simulations produced by an international team of economists and policy experts show this fall in demand has the potential to leave vast reserves of fossil fuels as “stranded assets”: abruptly shifting from high to low value sometime before 2035.

Such a sharp slump in fossil fuel price could cause a huge “carbon bubble” built on long-term investments to burst. According to the study, the equivalent of between one and four trillion US dollars could be wiped off the global economy in fossil fuel assets alone. A loss of US$0.25 trillion triggered the crash of 2008 by comparison.

Publishing their findings today in the journal Nature Climate Change, researchers from Cambridge ̽��ֱ�� (UK), Radboud ̽��ֱ�� (NL), the Open ̽��ֱ�� (UK), Macau ̽��ֱ��, and Cambridge Econometrics, argue that there will be clear economic winners and losers as a consequence.

Japan, China and many EU nations currently rely on high-cost fossil fuel imports to meet energy needs. They could see national expenditure fall and – with the right investment in low-carbon technologies – a boost to Gross Domestic Product as well as increased employment in sustainable industries.

However, major carbon exporters with relatively high production costs, such as Canada, the United States and Russia, would see domestic fossil fuel industries collapse. Researchers warn that losses will only be exacerbated if incumbent governments continue to neglect renewable energy in favour of carbon-intensive economies.

̽��ֱ��study repeatedly ran simulations to gauge the outcomes of numerous combinations of global economic and environmental change. It is the first time that the evolution of low-carbon technologies has been mapped from historical data and incorporated into "integrated assessment modelling".

“Until now, observers mostly paid attention to the likely effectiveness of climate policies, but not to the ongoing and effectively irreversible technological transition,” said Dr Jean-François Mercure, study lead author from Cambridge ̽��ֱ��’s Centre for Environment, Energy and Natural Resource Governance (C-EENRG) and Radboud ̽��ֱ��.

Prof Jorge Viñuales, study co-author from Cambridge ̽��ֱ�� and founder of C-EENRG, said: “Our analysis suggests that, contrary to investor expectations, the stranding of fossil fuels assets may happen even without new climate policies. This suggests a carbon bubble is forming and it is likely to burst.”

“Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands,” he said. “For too long, global climate policy has been seen as a prisoner’s dilemma game, where some nations can do nothing and get a ‘free ride’ on the efforts of others. Our results show this is no longer the case.”

However, one of the most alarming economic possibilities suggested by the study comes with a sudden push for climate policies – a ‘two-degree target’ scenario – combined with declines in fossil fuel demand but continued levels of production. This could see an initial US$4 trillion of fossil fuel assets vanish off the balance sheets.

“If we are to defuse this time-bomb in the global economy, we need to move promptly but cautiously,” said Hector Pollitt, study co-author from Cambridge Econometrics and C-EENRG. “ ̽��ֱ��carbon bubble must be deflated before it becomes too big, but progress must also be carefully managed."

One of the factors that may contribute to the tumult created by fossil fuel asset stranding is what’s known as a “sell-out” by OPEC (Organisation of the Petroleum Exporting Countries) nations in the Middle East.

“If OPEC nations maintain production levels as prices drop, they will crowd out the market,” said Pollitt. “OPEC nations will be the only ones able to produce fossil fuels at the low costs required, and exporters such as the US and Canada will be unable to compete.”

Viñuales observes that China is poised to gain most from fossil fuel stranding. “China is already a world leader in renewable energy technologies, and needs to deploy them domestically to tackle dangerous levels of pollution. Additionally, stranding would take a higher toll on some of its main geopolitical competitors. China has a strong incentive to push for climate policies.”

̽��ֱ��study authors suggest that economic damage from adherence to fossil fuels may lead to political upheaval of the kind we are perhaps already seeing. “Mass unemployment from carbon-based industries could feed public disenchantment and populist politics,” Viñuales said.

̽��ֱ��authors argue that initial actions should include the diversifying of energy supplies as well as investment portfolios. “Divestment from fossil fuels is both a prudential and necessary thing to do,” said Mercure. “Investment and pension funds need to evaluate how much of their money is in fossil fuel assets and reassess the risk they are taking.”

“A useful step would be to expand financial disclosure requirements, making companies and financial managers reveal assets at risk from fossil fuel decline, so that it becomes reflected in asset prices,” Mercure added.

*International Energy Agency. World Energy Outlook (OECD/IEA, 2016).

Macroeconomic simulations show rates of technological change in energy efficiency and renewable power are likely to cause a sudden drop in demand for fossil fuels, potentially sparking a global financial crisis. Experts call for a “carefully managed” shift to low-carbon investments and policies to deflate this “carbon bubble”.

Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands

Jorge Viñuales

Rich

Energy

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New report on macro-economic impact of Brexit questions Treasury forecasts

fpjl2 — Fri, 06 Jan 2017 10:01:28 +0000

̽��ֱ��economists have also been working with lawyers at the CBR to explore the possible impact of Brexit. They warn that the UK is in danger of remaining a low wage, low skill country unless it can create the conditions for a reorientation of its economic model post-Brexit.

In a new podcast for the CBR, based at the Cambridge Judge Business School, Graham Gudgin, one of the authors of the new report: ̽��ֱ��Macro-Economic Impact of Brexit: Using the CBR Macro-Economic Model of the UK Economy (UKMOD), and Simon Deakin, Director of the CBR and Professor of Law at the ̽��ֱ�� of Cambridge, discuss how the UK economy is likely to perform in 2017 and what would be the best model for leaving the EU.

Gudgin says that, according to ̽��ֱ��Treasury, we should have been in recession by now, but we are not. "Things are maybe a bit delayed but the whole succession of investment announcements we have had from Nissan, Microsoft and others suggests that companies are taking a much more sanguine view of this than the Treasury and others have suggested," he says.

Possible options: from the EEA to bespoke trade deals

Deakin explains the four possible options the UK government could pursue for leaving the EU: re-joining (or remaining in) the EEA (European Economic Area); becoming a member of the EU’s customs union; undertaking a series of bespoke trade deals, such as Switzerland has; or, if none of the above apply, defaulting to the rules of the World Trade Organization. ̽��ֱ��first two of these would mean accepting the free movement of persons, which the current policy of the British government appears to rule out.

Gudgin suggests that, since the policy of migration control is likely to be maintained, the UK will try to negotiate a new trade deal with the EU, perhaps along the lines of the recent EU-Canada agreement. Some argue that this could take a decade or more to achieve, but Gudgin takes the view that since we are starting from an existing free-trade situation, the task is much easier.

No quick agreement is however likely and whether the EU and the UK can negotiate transitional arrangements to bridge that gap remains to be seen. Any new trade deal will also have to be conducted within the framework of WTO rules, says Gudgin, which will add to the complexity of the negotiations.

Deakin explains: “Nearly every European country is either in the single market or in the customs union. For example, Norway, via the EEA, is in the single market but not the customs union; Turkey is in the customs union but not the single market. There are a number of other options. Switzerland is not part of the European Economic Area, but has a number of bilateral trade deals with the EU.

"These are conditional on Switzerland allowing free movement of labour (which a recent Swiss referendum vetoed) and capital. Countries in the single market, including those in the EEA, must conform to EU rules and regulations regarding product standards, labour laws and environmental protection, among other things.

"Customs union membership implies internal free trade and a single external tariff, but countries outside the EU which are in that position, such as Turkey, cannot make their own trade deals with third countries. If we went for that option post-Brexit, we would not be bound by all the rules of the single market but we couldn’t do our own trade deals with third countries.

̽��ֱ��WTO also have rules on how migrant workers may be treated in host states which are not that dissimilar to those operating in the EU’s single market
Simon Deakin

“If we were in the EEA we couldn’t avoid rules on free movement of labour or capital. You either accept the four freedoms, the movement of goods, services, people and capital over borders, or you don’t; you can’t cherry pick. ̽��ֱ��UK could try for a Swiss style option where you try to have free movement but then modify it somewhat, but the Swiss have had to sign up to most aspects of free movement in order to get access to the single market. To get around the rules of free movement of labour and capital it is highly likely the UK would have to be outside the EEA.

"We could still sign up to the customs union, Turkey isn’t subject to the rules on free movement of labour, for example, nor is the EU required to accept free movement of persons from Turkey into the EU, but then we wouldn’t have the freedom to do trade deals with third countries, which the UK has said it wants to have; that is why the International Trade Department was brought back.

“WTO rules do not require member states to accept free movement of labour, they do, however, contain some rules on issues like state aids, to prevent distortions of international trade. ̽��ֱ��WTO also have rules on how migrant workers may be treated in host states which are not that dissimilar to those operating in the EU’s single market, and are highly contentious for the same reasons. WTO rules on these issues are generally not as strict as EU laws and do not form part of UK domestic law. International law obligations cannot be enforced in the same way as EU laws can be. However, the WTO option is not a blank slate for the UK.”

Trade deal within two years – unlikely

Deakin goes on to say that as things stand there is uncertainty over what Brexit might mean, even if it is possible to identify some of the main features of each of the principal options: “Lawyers can say what the general framework is for each of these four options, EEA, customs union, Swiss option, WTO, but until we know more about how the government will wish to conduct its negotiations with the EU and about the EU’s position going forward it is hard to make predictions. There are many issues we don’t have a clear answer to.

“We can sketch out broadly what happens for each of these main options but I think there is a case for more research to be done. It is most unlikely that there will be a trade deal negotiated within two years of triggering Article 50, and as the process of negotiation and deliberation unfolds new issues will arise. These may crop up at sector level, particular industries may have issues that need to be worked through, and individual companies may raise points about their position and if they receive guarantees from government there will be issues of state aids to consider under both EU and WTO law. At the moment we just don’t have a good set of answers to these questions.”

Deakin says a transitional agreement with the EU would need to be a one-off bespoke arrangement as there is no provision for such an agreement within EU treaties: “We are bound by EU law until we leave, we are bound by international law to maintain the treaties that we have signed up to until we withdraw from them. Until the European Communities Act is repealed we must apply EU law domestically and even after the so called Great Repeal Act, which the government has promised to bring in, is implemented, many of the same provisions will be replicated within UK law.

Transitional agreement?

“There is talk of a so-called transitional agreement and that could involve staying in the EEA, while things are worked out, but there is no obligation on the side of the EU to offer us a transitional deal. This would have to be a bespoke arrangement as it is not provided for at the moment under the EU treaties. It remains to be seen if that sort of soft landing is possible, let’s see what is put on the table after negotiations between the UK and the EU begin. Whatever happens, we need to understand the institutional impact of Brexit in order to get a better understanding of what its economic effects will be.

“We do need independent research to be carried out on this question because so far most of the research that has been done on this has been by one or other side of the Brexit argument. ̽��ֱ��government has its own researchers in the civil service and of course this is objective, high quality research; the OBR is doing independent economic forecasting. However, there is a public demand for independent, non-partisan research, conducted outside government and the political arena. Thus there is an important role for ̽��ֱ��-based research; this should feed into the process of deliberation as Brexit unfolds”.

We have looked very carefully at what the Treasury has said about this and we find its work very flawed and very partisan
Graham Gudgin

Gudgin agrees with Deakin that better research and economic forecasting models are needed. He thinks that in reality the only option for the UK to leave the EU, other than the WTO fall-back, is under the terms of the so called Canadian model.

“There are probably only two practical options. One is a free trade agreement along the lines of the one Canada has just signed, or else no agreement on trade in which case you fall back on WTO rules. ̽��ֱ��impact of both of those is pretty uncertain. We have looked very carefully at what the Treasury has said about this and we find its work very flawed and very partisan. It is not objective. I agree with Deakin that we need some more objective economic work on this, the whole debate has been coloured by a lot of hyperbolic discussion.

̽��ֱ��Treasury: four quarters of recession?

“ ̽��ֱ��Treasury said there would be four quarters of recession, we have had six months since the Brexit vote, we should have been in recession by now, but we are not. Things are maybe a bit delayed but the whole succession of investment announcements we have had from Nissan, Microsoft and others suggests that companies are taking a much more sanguine view of this than the Treasury and others have suggested.

“We have looked at the Nissan deal in terms of what degree of currency depreciation you would need to offset the 10 per cent tariff that motor manufacturers could face under WTO rules, and the answer to us is that it looks like a 15 per cent depreciation of sterling would offset a 10 per cent tariff. We have already had a 12 per cent depreciation so we are pretty well there. This may have been what the government was relying upon: it is the currency depreciation that bridges that gap."

Gudgin says that the EU has not been very good at agreeing free trade deals with third countries: “Theresa May has said very clearly that there will be control over migration and she rightly recognises that was the key point in the referendum. ̽��ֱ��EEA and Swiss bilateral treaties all depend on free movement of labour. It shows just how difficult even the Swiss approach is.

" ̽��ֱ��Canadian model is a free trade agreement which any country can have with the EU, but historically the EU has not been good at having free trade agreements with others. It doesn’t have a free trade agreement with China or the US, and some people such as the Economists For Brexit see the EU as being a highly protectionist organisation. If the EU has a free trade agreement with Canada, good heavens, they surely can have one with the UK.”

Gudgin explains these predictions in the podcast:

“2017 won’t be a great year but growth of GDP will be between 1.0 and 1.5 per cent rather than the 2 per cent it would have been without Brexit. It could even be 2 per cent but we don’t yet really know much about company investment intentions. GDP growth is slowing but will not be too bad.
" ̽��ֱ��sterling depreciation of 10 to 12 per cent will mean inflation will rise to about 3 per cent by the end of 2017. It will be higher than it has been for some years. ̽��ֱ��big question is will inflation get out of hand and we don’t think it will. Remember most countries have been trying to increase their inflation up to 2 per cent to get their exchange rates down. ̽��ֱ��UK has done it in one bound.
" ̽��ֱ��UKMOD equations tell us wages will start to rise as prices rise. We are pretty close to full employment, so workers have bargaining power. ̽��ֱ��Bank of England published its forecast for wages recently and we agree wages will rise to something like 3 per cent by the end of 2017."

̽��ֱ��above text was originally posted as a blog on the Judge Business School website.

Economists at the Centre for Business Research (CBR) have challenged the assumptions of the Treasury in their new forecast for the UK economy and the impact of Brexit in 2017.

There is a public demand for independent, non-partisan research, conducted outside government and the political arena. There is an important role for ̽��ֱ��-based research; this should feed into the process of deliberation as Brexit unfolds

Simon Deakin

̽��ֱ��text in this work is licensed under a Creative Commons Attribution 4.0 International License. For image use please see separate credits above.

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Study reveals economic impact of El Niño

fpjl2 — Fri, 11 Jul 2014 13:47:33 +0000

̽��ֱ��Paper, Fair weather or foul: the macroeconomic effects of El Niño, by Dr Kamiar Mohaddes of Cambridge's Faculty of Economics and Paul Cashin and Mehdi Raissi of the International Monetary Fund comes as the Australian Bureau of Meteorology says there is at least a 70% chance of an El Nino weather event developing in 2014.

El Niño is a band of above-average ocean surface temperatures that periodically develops off the Pacific coast of South America, and causes major climatological changes around the world. ̽��ֱ��last one was in 2009/2010.

El Niño can affect commodity prices and the macroeconomy of different countries. It can constrain the supply of rain-driven agricultural commodities; reduce agricultural output, construction, and services activities; create food-price and generalised inflation; and may trigger social unrest in commodity-dependent poor countries that primarily rely on imported food.

̽��ֱ��El Niño effect is found to be most severe in the Asia and Pacific region. For instance, it causes hot and dry summers in southeast Australia; increases the frequency and severity of bush fires; reduces wheat exports, and drives up global wheat prices. Moreover, El Niño conditions usually coincide with a period of weak monsoon and rising temperatures in India, which adversely affects India’s agricultural sector, increases domestic food prices, and adds to inflation and inflation expectations. Furthermore, mining equipment in Indonesia relies heavily on hydropower; with deficient rain and low river currents, less nickel (which is used to strengthen steel) can be produced by the world’s top exporter of nickel. For the United States, on the other hand, El Niño typically brings wet weather to California (benefiting crops such as limes, almonds and avocados), reducing fires in the west and bringing warmer winters in the Northeast, increased rainfall in the South, diminished tornadic activity in the Midwest, and a decrease in the number of hurricanes that hit the East coast.

̽��ֱ��Cambridge paper analyses the international macroeconomic transmission of El Niño weather shocks in a dynamic multi-country framework, taking into account the economic interlinkages and spillovers that exist between different regions.

Overall, the paper shows that while Australia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to an El Niño shock, other countries may actually benefit from an El Niño weather shock (either directly or indirectly through positive spillovers from major trading partners), for instance, Argentina, Canada, Mexico and the United States. Furthermore, most countries in the sample experience short-run inflationary pressures following an El Niño shock, while global energy and non-fuel commodity prices increase.

̽��ֱ��researchers argue that, given these implications, macroeconomic policy formulation should take into consideration the likelihood and effects of El Niño episodes. Kamiar Mohaddes says: “Our research shows that the economic consequences of El Niño differs across countries – some lose and some benefit from such a weather shock. This is important for economic planning, particularly as such weather events are happening in cycles and their impact is sometimes very large. Countries with elevated inflation like India could be particularly susceptible to such episodes.”

El Niño has a significant impact on the world and local economies - and not always for the worst - and countries should plan ahead to mitigate its effects, according to a new Working Paper from the ̽��ֱ�� of Cambridge.

Weather effects are becoming more common and their impact is getting stronger and stronger

Kamiar Mohaddes

Jon Sullivan

El Niño waves crash into a pier

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