Tohoku Pacific earthquake and Economic Indicators: a

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1 Tohoku Pacific earthquake and Economic Indicators: a comparison with previous natural and economic shocks Past experience with natural disasters suggests that bad as this shock is, it may not have the force to change the direction of recovery trends that were already under way, even though they have been somewhat weaker. Global expansionary momentum was gathering force in early 2011, while export growth in Japan picked up recently. However, Japan could undergo an extended period of slower growth more along the lines of the recovery from the global Great Recession ( ) than the property bubble burst (1990) or the Asian Financial Crisis (1997). More importantly, if the damage from the nuclear crisis remains limited, the economy will slow, but tjapan should ldbe able to avoid iddipping i back kinto recession. But, as with many other advanced economies, Japan s fundamental sources of growth, like employment and labor productivity, are not particularly strong. (see The Conference Board Total Economy Database, January 2011 ). The regional economy of the affected area (the four prefectures of Iwate, Miyagi, g, Fukushima, and Ibaraki) will likely take longer to recover than the overall Japanese economy. Source: OECD, Eurostat, The Conference Board 1

2 Economic activity is expected to slow in the first half of However, Japan should be able to avoid dipping back into recession, according to the LEI for Japan The Conference Board Leading Economic Index (LEI) for Japan 112 The Conference Board Leading Economic Index (LEI) for Japan The LEI did not show a marked response to the Kobe earthquake 84 The eaes latest data available in March pointed to a somewhat mixed outlook for near term conditions unlike its signals in 1990 and 1997 or 2008 (left panel) 76 Source: The Conference Board Horizontal axis denotes months before and after the shock. 0 refers to the month of the shock and indicators are rebased to equal at 0. 2

3 Past experience with natural disasters suggests that the underlying trend of the economy carries strong momentum. But, the trend in Japan was mixed in The Conference Board Coincident id Economic Index (CEI) for Japan The Conference Board Coincident Economic Index (CEI) for Japan The upward trend in current economic conditions continued after the Kobe earthquake and the bursting property bubble in Current economic conditions before the earthquake were mixed, but not as weak as before the Great Recession Current economic conditions deteriorated rapidly after the Asian Financial Crisis in Source: The Conference Board Horizontal axis denotes months before and after the shock. 0 refers to the month of the shock and indicators are rebased to equal at 0. 3

4 Many factories have suspended production. IP is likely to contract in the short term, but the duration depends on reconstruction ti and whether a larger crisis i develops 110 Industrial Production Industrial Production In January, industrial production recovered after a set back in the fall of Industrial production deteriorated rapidly during the Great Recession Sources: Cabinet Office of Japan; The Conference Board Horizontal axis denotes months before and after the shock. 0 refers to the month of the shock and indicators are rebased to equal at 0. 4

5 Subsequent reconstruction efforts will boost growth. The damages are currently estimated at 2.5 to 4% of GDP or even higher. Real GDP 103 Real GDP Sources: Cabinet Office of Japan; The Conference Board After Kobe, the central government spent about 1% of 19 GDP on rebuilding. Horizontal axis denotes months before and after the shock. 0 refers to the month of the shock and indicators are rebased to equal at 0. 5

6 The Tohoku Pacific earthquake: too early to assess economic consequences The areas impacted the most account for 6 to 7% of Japan s population and economic output. damages were estimated at around 2% of GDP. The impact of the March 11, 2011 disaster may be much worse. The damages are currently estimated at 2.5 to 4% of GDP or even higher. One-fifth of Japan s domestic nuclear capacity has been closed, resulting in electricity shortages. Many factories have suspended production. Industrial production is likely to contract in the short term (beware of the impact on the supply chain). Subsequent reconstruction efforts will boost growth. After Kobe, the central government spent about 1% of 19 GDP on rebuilding. The Bank of Japan has decided to double the size of its asset purchase program to 10 trillion yen (2% of GDP), providing ample liquidity. Japan represents approximately 1.1% of Euro Area exports, 1.5% of United Kingdom exports, 4.7% of U.S. exports, and 8% of Chinese exports. Source: OECD, Eurostat, World Bank,The Conference Board 6