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Quake Could Rattle Already Shaky Recovery Quake Could Rattle Already Shaky Recovery

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Economy / Economy

Quake Could Rattle Already Shaky Recovery

Analysts worry about impacts on fragile Japanese, global economies.

A shop owner chats with a neighbor over a road that buckled during the earthquake in Japan.(TOSHIFUMI KITAMURA/AFP/Getty Images)

March 11, 2011

The massive 8.9-magnitude earthquake that shook Japan on Friday, and the tsunami waves it sent rolling across the Pacific, is the latest blow to a global economy that has struggled for the past two years to recover from the Great Recession.

It's very early to judge the quake's potential impact on the fragile recovery, which has roared along in developing markets and begun to gain steam in the United States but remains sluggish in Europe. Industrial economies are already feeling strains from rising global oil prices born of the turmoil in the Middle East.

This much is clear: Japan's economy, the world's third-largest, was struggling with low growth and high debt levels even before the quake - and any major hit to the Japanese economy will, at least to some degree, sap strength from the global recovery.

 

Analysts cautioned on Friday morning that the economic effects from the quake are nearly impossible to predict so soon after it struck.

"The direct human and economic costs could be significant but it is too early to provide accurate estimates," Nomura analysts Peter Westaway and Takuma Ikeda wrote, adding that after the 7.3-magnitude Kobe quake in 1995, Japan suffered a "significant" short-term economic impact "but the long-run impact was limited."

The chief economist at High Frequency Economics, Carl Weinberg, warned that the quake could undercut Japan's cash flows and food supplies, and that damage to ports and airports could extract a large toll on trade in the world's fourth-largest trading nation.

"We do not know what we do not know about the damage that has been done," Weinberg wrote in a research note. "Experience tells us that the economic shock can be, and likely will be, much bigger than anyone can imagine."

An analysis from IHS Global Insight noted that Japan is far better equipped than most to handle tremors due to its long and frequent experience with the natural disasters. Buildings there are constructed using steel and ferro-concrete and coastal towns have long had tsunami-protection plans. That said, the ferocity of the earthquake, the strongest since 2004, will inevitably exact severe damage. That will put pressure on the country's already strained public finances as the Japanese government spends on response to the emergency.

Global markets fell after news of Friday's quake spread, but not dramatically.

The worst declines came in Japan, where the Nikkei fell to a five-week low at the end of trading as news of the disaster spread. After the close, Nikkei futures fell more than 3 percent further.

Futures for the three major U.S. equity markets were all down - but less than 1 percent in the aftermath of the quake. That follows a steep decline on Thursday, when the Dow Jones Industrial Average shed 228 points, or 1.87 percent.

Global equities were down somewhat. An index of world stocks compiled by investment information group MSCI fell about half a percent, according to Reuters.

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