Climate economy models not fit for purpose, critics say – and other economy stories to read this week

As climate economy predictions are revised ahead of COP28 in the United Arab Emirates, critics warn the models being used are not fit for purpose and even prevent effective policy action, Reuters reports.

Record heat, droughts and floods have already wrought heavy losses, even before the Paris Agreement’s 2°C warming limit is reached. Yet certain models suggest future warming will cause less economic harm through to 2100 than COVID-19 or the 2008 crisis.

Some policy-makers have acknowledged the limitations of current models. European Central Bank Executive Board Member Isabel Schnabel said in September 2023 they could “underestimate the economic fallout”.

Others, like Thierry Philipponnat, author of a Finance Watch report, says that integrated assessment models (IAMs) often rely on outdated economic assumptions. “Climate change is fundamentally different to other shocks because once it has hit, it doesn’t go away,” he says.

While advocates of IAMs point to ongoing improvements, Nicholas Stern of the LSE/Grantham Research Institute believes they are still too narrow to adequately address climate change’s extreme risks, and that significant reform is required.

“We’ll need to look at energy models, cities, natural capital – and that is serious, deep economics around structural change,” he told Reuters.

The lack of reliable and accurate data for determining climate risk is widely acknowledged. IMF experts writing for the World Economic Forum say policy-makers “face major information gaps that impede their ability to understand the impact of policies – from measures to incentivize cuts in emissions, to regulations that reduce physical risks and boost resilience to climate shocks”.

Germany has indefinitely postponed talks on next year’s budget following a court ruling prohibiting the transfer of €60 billion ($65 billion) in unspent COVID-19 funds to green investments and other purposes.

This delay heightens the challenge facing Chancellor Olaf Scholz’s coalition as it deals with this major funding gap, concerns over every aspect of the country’s spending and the possibility of a recession, according to Reuters.

It’s yet another crisis for a major economy still dealing with the fallout from a fuel crisis stemming from its former reliance on Russian oil and the effects of China’s slowdown on exports, says Bloomberg.

Most of Germany’s new spending commitments have already been frozen this year, including use of the €200 billion ($220 billion) Economic Stabilization Fund. The situation casts uncertainty over the country’s special project funding commitments, such as aid for Ukraine.

Germany has responded to the latest developments by suspending its “debt brake” – a limit on annual federal borrowing – for 2023. This is the fourth time it has done so in as many years.

Slightly more positively, the country’s recent economic downturn could be showing signs of receding, with the latest Composite Purchasing Manager’s Index rising to a four-month high of 47.1 in November from 44.9 in October. This is above economists’ expectations of 46.5, but as the figure is under 50 it still indicates a contraction in business activity.

US Federal Reserve officials have agreed to proceed “carefully” with further interest rate hikes, only making rises if inflation progress falters. With inflation cooling – consumer prices were unchanged on the month in October – the focus is on how long the policy rate should be maintained in the current 5.25-5.50% range.

The Bank of Japan will end its negative interest-rate policy by the end of 2024, according to 85% of economists surveyed for a recent Reuters poll. This is up from 63% in an October poll and 52% in September. The remainder predict it is likely to happen in “2025 or later”.

The UK has announced deeper tax cuts than expected in its Autumn Statement, in a bid to boost the economy before a general election next year. However, the government’s forecasters predict slow growth, with expectations of persistent inflation and living standards 3.5% lower than before the pandemic in the 2024/25 financial year.

Brazil has lowered its 2023 growth forecast to 3.0% from 3.2% and its 2024 projection to 2.2% from 2.3%. The country had a poor third quarter because of high borrowing costs and falling commodity prices affecting tax revenue, according to Finance Minister Fernando Haddad.

India’s retail inflation dropped to 4.87% in October, approaching the central bank’s 4% goal. The fall is a result of lower crude oil prices. But officials remain concerned by persistently high food inflation.

Canada’s annual inflation cooled more than expected to 3.1% in October, reducing the likelihood of further interest rate hikes.

Eurozone banks are showing early signs of stress from rising loan defaults and late payments amid higher interest rates, the European Central Bank has warned. The impact of higher borrowing costs could also create broader problems for people, companies and governments across the euro area, UK newspaper The Guardian reports.

China is unleashing a raft of financing for its ailing property sector, with regulators drafting eligible developer list and banks being told to meet funding needs. But immense challenges remain, say Bloomberg analysts, with firms facing an estimated CNY18.9 trillion ($2.6 trillion) liquidity shortfall in 2023.

Digital technologies will play an important role in helping EU member states meet their energy efficiency targets, says Matthias Rebellius, CEO of Siemens. Here, he explains how the EU’s Energy Efficiency Directive will help maximize gains in the building sector, which accounts for about 40% of its energy consumption.

Countries that can attract, develop and retain skilled people can boost their competitive edge in the global economy. The Global Talent Competitiveness Index 2023 ranks 134 countries on their talent appeal and retention. Find out which countries top the list.

As China’s Belt and Road initiative turns 10 years old, World Economic Forum Digital Editor Spencer Feingold assesses the progress made by an infrastructure project that aims to connect multiple continents across land and sea.