What are the impacts on GDP? How to reduce losses?, Central Bank | Monetary Policy | Weather after Extreme Weather
"The season when extreme weather occurs will lead to a decline in GDP, and there will still be negative effects in the following quarters." - Recently, Tang Yao, Associate Professor of Applied Economics at the Guanghua School of Management at Peking University, and his team conducted a quantitative study on the economic impact of extreme weather and reached the above conclusion.
According to the Blue Book of Climate Change in China, the climate risk index in China is showing an upward trend, characterized by frequent and intense extreme heat events, an increase in extreme heavy rainfall events, and increased fluctuations in the average intensity of typhoons.
GDP decreased by 0.2% in the current quarter after extreme weather
Ye Yindan, a researcher at the Bank of China Research Institute, told China News Service that extreme weather events such as storms, floods, droughts, and heatwaves can have a wide-ranging impact on the economy. Extreme weather events may lead to reduced crop yields, infrastructure damage, energy supply disruptions, and other issues. If extreme weather events occur frequently or last for a long time, their impact on economic growth, employment, inflation, and other factors will be significant.
A recent study conducted by Tang Yao's team showed that after a major extreme weather shock, GDP decreased by 0.2% in the current quarter, with the largest decline reaching -0.5% in the third quarter. After that, the output gap slowly decreased but remained significantly negative for two years; The CPI remained unchanged in the current quarter but rose by 0.1% in the third quarter, and its fluctuations disappeared in the sixth quarter; The total amount of loans received by non-financial enterprises decreased by 0.1% in the current quarter, with the largest decline occurring in the second quarter and gradually recovering thereafter.
After decomposing the fluctuations in GDP, the research team found that nearly one seventh of the fluctuations came from extreme weather shocks.
Tang Yao introduced to China News Agency that the study takes into account the interaction between monetary policy, macro credit scale, inflation, and output. Through regression analysis of multiple variables, the final estimate obtained is the independent impact of extreme weather on output.
The above research refers to the actuarial climate index method proposed by the American Society of Actuaries and the Canadian Society of Actuaries in 2020, and constructs the China ACI index for measuring extreme weather risks in China from 1990 to 2020. The ACI index constructed based on daily meteorological data from 840 meteorological stations nationwide includes information on five aspects: extreme high temperature, extreme low temperature, continuous rainfall, drought, and strong winds.
The ACI index of the research team and the China Climate Risk Index published by the National Meteorological Center are highly similar in quarterly frequency and have good quality. In addition, the study also analyzed the impact of extreme weather on non-financial enterprises.
The study analyzed data from over 4000 non-financial enterprises listed on A-shares and found that after experiencing a major extreme weather shock, the average loan received by enterprises decreased by 0.2% after one quarter, and the added value of output decreased by 0.8% after two quarters.
Tang Yao introduced that in the data, loans decrease before output, indicating that credit is an important channel for the long-term impact of extreme weather. Further analysis reveals that credit risk and market confidence are significant factors affecting credit response.
Firstly, in terms of credit risk, weather shocks lead to an increase in default risk for enterprises, and in stages where the credit risk of the enterprise itself or macro credit risk is high, extreme weather shocks have a greater impact on credit.
Secondly, in terms of market confidence, after a climate shock, stock market analysts tend to decline their credit ratings and expected profits for companies. However, during periods of lack of confidence among market entities, such as when the entrepreneur confidence index and PMI index are low, extreme weather shocks have a greater impact on corporate credit.
How can monetary policy alleviate extreme weather shocks?
Based on further simulation analysis and research, Tang Yao's team proposes that monetary policy can be actively applied to cope with extreme weather shocks.
Tang Yao stated that general monetary policy theory suggests that monetary policy should mainly respond to fluctuations in output and prices. Specifically, in China, the goal of the central bank is to stabilize prices and promote growth.
However, research has found that due to the negative feedback loop formed by extreme weather shocks and credit supply, the impact of extreme weather on the economy is long-term. If interest rates remain unchanged after extreme weather shocks, GDP will decrease by an additional 0.1% over 5 to 10 years. Therefore, monetary policy that focuses on short-term output shocks cannot fully cope with the impact of extreme weather. It is necessary to deeply analyze the driving mechanisms of extreme weather shocks in theoretical and policy research, and optimize the response of monetary policy rules to them.
Tang Yao introduced that if the central bank believes that an extreme weather event will have a significant impact, it can immediately relax monetary policy in the season of the impact. Loose monetary policy can improve the financing environment for enterprises, hedge against the tightening effects of bank credit tightening, help enterprises cope with extreme weather shocks, and thus stabilize overall output.
Ye Yindan also stated that after extreme weather shocks, it is necessary to actively guide financial institutions to increase credit supply. Coordinate and allocate inclined credit resources, increase credit support for disaster stricken enterprises, and provide precise and early funding. Especially for enterprises that have been temporarily affected by disasters but still have development prospects, we will not withdraw, suppress, or cut off loans. We will actively strengthen the promotion of renewal loans and financial products such as "borrowing and repayment as needed", and adjust repayment arrangements according to "one enterprise, one policy".