MNI INTERVIEW: Central Bank Supply-Chain Data Old, Incomplete

Central banks are likely to be playing catch-up for a long time to factor into their forecasts the impact of potential supply-chain disruptions following on from U.S. tariffs, with some key data years out of date, a leading researcher and adviser in the field told MNI.

The Bank of England and other central banks are all battling to incorporate supply-chain effects into their latest forecast rounds, but any progress looks set to be incremental. Input-output (I-O) models developed in trade economics, which reflect how one country's or sector's outputs are another's inputs, shed light on supply chain-interactions but data quality and timeliness are highly problematic, said Angelos Theodorakopoulos a researcher at Aston Business School and Centre for Business Prosperity and an academic visitor at the BOE.

"If we would like to better integrate these linkages into real time forecasts, there's still a lot that researchers could do to ensure that these predictions are as timely as possible," Theodorakopoulos, who has also acted as a consultant to the World Bank, said in an interview.

MPC member Megan Greene referred to ongoing work by authors including Theodorakopoulos in a speech in February, noting how UK exposure is greater to China than to the U.S. when all linkages are factored in, but the data cited in this research was from 2020.

OLD DATA

OECD data for I-O linkages are aggregated and backdated, so cannot provide clear answers to potentially crucial questions such as what happens if semi-conductor supply is disrupted, he said.

"We have aggregate sectors like machinery or electronics ... where do semiconductors lie within them, and how important are they, if we think about substitution patterns across goods? So in that sense, I think our understanding is still rather aggregate when using I-O tables and therefore it might be muting some of the effects, especially if we're thinking about short-run effects," Theodorakopoulos said.

"It's not necessarily a modelling challenge, it's more a challenge on data. And ... this is something that countries need to work on in cooperation, because you can't just have, for example, the UK having the best data in the world. You also need to know how your inputs from the UK are used in the U.S., and then how they feed into China, production, etc.," he said.

"The latest available data goes up until 2020 and this means that we've missed the past five years, unless we use more disaggregated product-level trade [data] where more granularity and timeliness is available, albeit incomplete when it comes to capturing the full linkages of supply chains," Theodorakopoulos said.

There does not appear to be any single solution to this problem, he noted. (See MNI INTERVIEW: CenBank Balance Sheets Key To Tariff Response)

"As an economist it's probably not optimal to build this huge, massive model [and] it's going to give us a number, and we're just going to put all of our faith in it. As many institutions around the world do, we just have to have a mixture of models and outputs," he said.

HIDDEN LINKAGES

Theodorakopoulos's work puts the spotlight on “hidden linkages”, such as, for example, the degree to which cars made in the UK rely on inputs from Germany, China and elsewhere which are unclear at the aggregate level.

“You might actually be even more exposed to China than you would have thought, if you take into account these trade linkages," he said.

The core question central banks have been asking is whether tariffs and related supply chain restructuring will be inflationary, but while they are widely seen as hitting activity the inflation question has no easy answer, with questions over tariff retaliation and supply-chain dynamism. (See MNI INTERVIEW: Financial Conditions Back BOE Easing - Aikman)

"From a trade-modelling perspective, we know that if you increase protectionism, then effectively, you're going to end up with increased prices for that good that you protect, or that sector ... But even in the simplistic scenario that has no reciprocal tariffs, the magnitude of those effects remains unclear, because it also depends on how elastic or inelastic your supply and demand is and the size of your economy," he said.