Natural disasters are normally followed by v-shaped economic recessions, but the Japanese nuclear power plant explosions have complicated risk assessments.
This article titled “Fukushima factor adds pressure to economic fallout from Japan’s crisis” was written by Larry Elliott, for The Guardian on Tuesday 15th March 2011 20.16 UTC The three 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 Kyoto 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 can’t 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 north-eastern parts of the country affected by last week’s earthquake and tsunami. What makes this crisis different is the nuclear dimension. The three explosions at the Fukushima Daiichi plant puts this incident into a different category from either Kyoto or Katrina. There has been disruption to power supplies and people have been evacuated from a 12-mile exclusion zone around the plant, but it could potentially become far more widespread unless the Japanese can shut the plant down safely and quickly. Some analysts were last night starting 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. The 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 the situation in 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 while, in theory, it should be possible to do a full-scale risk assessment of the impact of Japan on, say, the UK, 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, – such as consumer electronics and cars – depending on how badly the major Japanese multinationals are affected by shortages of power and materials. One big unknown for the UK is the oil price, which has been adding to inflationary pressure in recent months but has fallen since late last week because traders believe the paralysis in Japan will lead to a drop in global demand. That trend may not last. If it does have a v-shaped recovery Japan will quickly return to more normal levels of oil usage. Meanwhile, the unrest in Bahrain is evidence that the problems for governments in the Middle East are far from over. So estimates that Japan’s crisis will shave perhaps 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 than that.
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