A cloud of uncertainty

The explosions at the Fukushima Daiichi nuclear plant in Japan have made the economic impact of last week’s natural disaster far more difficult to assess than the two templates used by analysts — the Kobe earthquake in 1995 and Hurricane Katrina a decade later — would suggest.

Normally, natural disasters are followed by V-shaped recessions. Output is badly affected in the short term as infrastructure is knocked out and people cannot work or shop. Output falls sharply for three to six months, but then rebounds as the reconstruction starts.

Government money is poured into the affected areas, leading to a mini construction boom as homes, roads and power supplies are rebuilt. Pent-up spending from the period immediately after the crisis is unleashed.

Despite Japan’s weak public finances, analysts would expect Tokyo to come up with the money to rebuild the northeastern parts of the country affected by last week’s earthquake and tsunami.

What makes this crisis different is the nuclear dimension. There has been disruption to power supplies and people have been evacuated from a 20km exclusion zone around the Fukushima Daiichi plant, but it could potentially become far more widespread unless the Japanese can shut down the plant quickly.

Astronomic economic costs
Some analysts were starting this week to imagine what might happen in the event Tokyo, with 13-
million people in its metropolitan district, had to be evacuated because of a radiation cloud heading its way.

The economic costs of such an event would be astronomic. In Europe Japan’s crisis is already having an impact. Angela Merkel has ordered a temporary shutdown of Germany’s pre-1980s nuclear stations, which according to estimates account for 7% of the country’s power. That is a significant energy loss for a country that is growing robustly.

A second factor is the impact the Sendai earthquake will have on consumer and business confidence. At present the global economy is characterised by a high degree of uncertainty over North Africa and the Middle East and now over Japan. Economists think they have a way of quantifying this uncertainty, but they don’t.

So, although in theory it should be possible to do a full-scale risk assessment of the impact of Japan on, say, the United Kingdom, that is not really possible.

In theory the effects should be limited because Japan is not a major trading partner for the UK and the days of intensive Japanese inward investment are over.

The complexity of global supply chains for the goods in which Japan is world leader could mean delays and disruptions in some sectors, depending on how badly Japanese multinationals are affected by shortages of power and materials.

One big unknown for the UK is the oil price, which has fallen because traders believe the paralysis in Japan will cut global demand. That trend may not last. With a V-shaped recovery Japan will quickly return to more normal levels of oil usage.

Estimates this week that Japan’s crisis will shave 0,1% or 0,2% off global growth this year, with a similar rebound in 2012, are little more than guesswork. It could be a lot worse. —

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