Will the Earthquake Delay Japan's Economic Recovery?

Last week: Last week the good news was about U.S. jobs. This week, the good news was about better than expected post-holiday retail buying. And yet the stock market was rattled first by concerns over how high the oil price spike may get, and then by news of yet another natural disaster. It would appear that for the moment there is a kind of asymmetrical response. Good news is being taken in stride while bad news engenders nervous jitters. If that is a valid assessment, it will likely be short-lived. The good news will continue and prevail. But if it does not continue, it might intensify nervous concerns. To be sure, there is plenty to worry about. But just as sure is the sense that the economy has – nearly two years after the recession ended – some fundamental solid footing.

THE SITUATION ABROAD

The global economy is beset by unrest, natural disasters, and by rising prices for food and energy. The forecast at the start of 2011 was for about 4 percent growth in global GDP. Disruptions caused by the unrest in the Middle East, earthquakes in New Zealand, and now Japan, plus rising prices could cumulatively take a few tenths of a point off the global economic growth path. Nevertheless, solid though not necessarily very strong gains are still being achieved, even in the face of these circumstances. Prolonged and even high spikes in oil and/or food prices, or intensifying and spreading unrest obviously could wreak further damage. It remains to be seen how all these interconnected events play out.

FACT OF THE WEEK

12 percent. An estimated one-quarter of the mortgages outstanding are “under water” (the money owed on the mortgage is more than the family could realize in a sale of the house). But only a fraction of these families might be facing foreclosure. The estimate is that only about 12 percent of these families are more than 25 percent underwater. And they are highly concentrated in the following states: Nevada, Arizona, Florida, Michigan, and California. Moreover, the economy and especially the labor market are now picking up. These trends can only help these families in those high-impact states make their payments, with some forbearance by the mortgage lenders.

QUESTION OF THE WEEK

The Japanese economy was already weak. Will this earthquake further delay any economic recovery?

Unfortunately, disasters seem to be happening with uncomfortable regularity. This is nowhere more true than in the Pacific “Ring of Fire.” This refers to an earthquake prone zone stretching from the east coast of Asia to the west coast of Latin America. It was only a few short weeks ago that an earthquake hit in New Zealand. Still, the evidence suggests that when an economy is weak, an event like this tends to have only a short-term negative impact. The recovery however, can have a positive impact, as was the case in the recent earthquake in Chile.

The latest data on The Conference Board Leading Economic Index® for Japan suggests that some improving trends were developing. Clearly, this event is causing some temporary economic damage. The loss of electric power, communications, and disruptions in the transportation systems have some economic consequences. There is nevertheless a good chance that these disruptions will prove limited and not fundamentally alter Japan’s road of economic recovery.

The earthquake just off the coast of Japan is a major event. And yet it also marks what improvements have been made over time to limit the damage. For example, a 7.9 earthquake in Japan in 1923 killed well over 100,000. Early estimates suggest this much more intense 8.9 earthquake killed far fewer (though each new report results in a higher estimate). A 6.8 earthquake in 1995 resulted in losses of close to $3 billion. It is impossible to estimate how much economic damage this latest event has caused. It certainly caused damage to the transportation systems. And repairing the damage will exacerbate the public debt problem in Japan. But just as Kobe, the city that suffered earthquake damage in the 1990s, is today a thriving business center, the only question is how long it will take to get there after this latest natural disaster. There is no doubt that Japan will get there.