Email not displaying correctly? Click to view web version.
The Future isn’t What it Used to be: Climate Change and the Non-Linear
January 27, 2020
One chilly day last fall, I found myself musing about the future of India.
There’s a country with enormous potential and, quite possibly, a bountiful future ahead of it, I thought to myself.
It has a huge population, a rapidly growing middle class, a stable, democratic system of government, rule of law, effective education and a firm command of advanced technologies.
In no way do I purport to be an expert on India or even know very much about it – the sectarian violence that’s erupted there since my little reverie, triggered by a controversial citizenship law, confirms that I don’t.
But I do like to speculate occasionally about the global economy, its various parts and their respective futures, and many other people do the same, with varying degrees of sophistication, insight and impact.
There’s one thing that we all tend to do when we muse about the future of economies, from amateur soothsayers like me to the most sophisticated professional forecasters. Our forecasting tends to be linear - we take the existing trends and extrapolate the future from them.
Take, for example, this long-term forecast of India’s GDP growth from the OECD.
What the economists at the OECD have done is essentially take the current trends in India and project them into the future.
We all know the future isn’t that simple. There are events that disrupt the smooth unfolding of current growth trends, the unexpected developments that originate somewhere outside the economy – what economists like to call “exogenous” shocks.
Hurricanes, floods, earthquakes, wars and revolutions – they can all disrupt the smooth, linear growth exemplified by the OECD chart.
Of course, we can’t blame economists for excluding exogenous shocks from their forecasting. By their very nature, they tend to be unpredictable.
But exogenous shocks are becoming more pervasive all the time.
As I was musing about the future of India the other day, an intrusive thought forced its way into my mind. I remembered something I’d recently read about India – it’s the country that’s most vulnerable to climate change in the entire world, according to a ranking by HSBC.
Suddenly, its future didn’t seem so bright.
It only took a little research to confirm the potential risks climate change poses to India are dire. Reports of extreme weather conditions there rendered even more extreme by climate change are numerous.
In November, Bloomberg reported that a study from Stanford University estimated the country’s economy is already 31% smaller than it would have been in the absence of global warming. That seems like a very large number, but even if it’s just a fraction of that, it’s concerning.
According to a story in the New York Times, in northern India, summer temperatures are hitting 120 degrees Fahrenheit, shutting down outdoor work in cities and entire regions for days at a time.
Conditions like that will make the rapid growth projected by the OECD very hard – if not impossible – to achieve.
We don’t know how climate change will unfold, in India or anywhere else. Collectively, we’re entering a period unlike anything we’ve experienced before, a period likely to be characterized by rapid, erratic and high-impact changes.
That’s in part because the systems that make up our climate are complex and interactive. We don’t know how they’ll interact with each other, as observed in an article in the New York Times last year by William B. Gail, past president of the American Meteorological Society and author of the book Climate Conundrums: What the Climate Debate Reveals About Us.
“What will actually emerge is largely unknowable because of the highly unpredictable nonlinear response to the warming of Earth’s complex and adaptive physical and ecological systems,” Gail wrote.
A recent study produced by the Bank of International Settlements and the Banque de France describes the situation this way: “climate change is characterized by deep uncertainty: assessing the physical risks of climate change is subject to uncertainties related to climate patterns themselves, their potentially far-reaching impacts on all agents in the economy, and complex transmission channels, especially in the context of globalized value chains.”
Clearly, just looking at current economic trends and projecting them into the future on a linear basis is not going to cut it any more. Something more holistic, something that takes into account the complex interaction between the environment and our economies into account at the most basic level, is urgently needed.
How urgently? Look at this chart of the frequency of natural disasters. This not a forecast - it’s the toll that climate change is already exacting based on insurance data.
On a trend basis, at least, this is one chart that’s dismayingly linear. I wonder what it will look like as the complex, non-linear effects of climate change intensify.
To deal effectively with climate change, we will have to do more than change our way of forecasting the economic future.
We may have to relinquish our conception of progress as one of continuous quantitative increase in GDP and redefine it to include sustainability and alignment with the environment.
It’s a hard habit to rid oneself of. But it will be necessary to change the way we think about the future if we’re respond effectively to climate change, the force that will increasingly define that very future in the years to come.
Market Strategist and Content Editor
"Cambridge Global Payments" is a trade name used by the following legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (UK) Limited, Cambridge Mercantile (Australia) Pty. Ltd. Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this
information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice. Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis. This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3 )An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy. Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge. Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you.
Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract. FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance. This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. Fees may be earned by
Cambridge (and its agents) in respect of any business transacted with Cambridge. The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document. © Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details. If you no longer wish to receive Market Wires, you may change your preferences at any time.