Potential impacts of the Japan disaster on the global and domestic economy
The recent tragic earthquake and subsequent tsunami has caused a significant disruption to the Japanese economy. The true cost of a disaster of this magnitude is weighed first and foremost in the human suffering that follows in the wake of events such as these. Sympathies go out to those whose lives have been overturned by this tragedy. While it is too early to assess the full economic impact of these events, we felt it would be helpful to outline some of the possible economic implications for Canada and the world.
According to industry experts here are some key points on global events:
Effects on the Japanese economy
- Prior to the earthquake, the Japanese economy was gathering momentum on the back of strong overseas demand from Asia and the U.S. As long as global demand continues, the Japanese economy will likely recover quickly.
- In the short term, the crisis in Japan will depress economic activity in the country, but in the long run it will likely be stimulative. It’s expected that the Japanese economy will grow faster than otherwise expected, as the country rebuilds.
- After the Kobe region earthquake in 1995, Japanese industrial production fell during the month of the earthquake but had fully recovered to pre-earthquake levels just a few months later. While there are differences between the Kobe disaster and the current incident, the general historical pattern of sudden decline followed by a reconstruction-led recovery holds across many examples of natural disasters in developed economies.
- The political instability in the Middle East and North Africa has caused an increase in oil prices. However, Japan is one of the world’s largest importers of crude oil. The recent disaster has resulted in a decrease in Japan’s demand for crude imports, as a consequence oil prices have retreated from recent highs.
- Lost output in Japan and disruption to industrial production will have a negative near-term impact on the global economy. But as Japan was not considered to be a major driver of the current expectations for a solid year of global growth in 2011, a temporary decline in Japanese output would likely not be a show stopper for global economic expansion.
- If the damaged nuclear power plants in Japan remain offline, the country will have to make up the lost electrical output with fossil fuels, such as coal and natural gas. The reconstruction of Japanese infrastructure would likely result in more commodity-intensive activity than expected, which ultimately could increase demand for crude oil and other natural resources.
Effect on Canada
- While Japan is a major Canadian trading partner, they are not large contributors to the Canadian economy so the domestic impact is likely to be negligible.
- Coal, agricultural products and other commodities are leading exports to Japan, and could see increased demand in the short term (e.g., coal may benefit if nuclear energy is slow to come back on line) and in the medium to long term (e.g., forestry products, as the country rebuilds).
- Canadian imports could be curtailed in certain sectors. Auto and auto-related parts are a leading import from Japan and this is a sector located in the disaster area. This could hinder auto production in Canada at Japanese company plants and lead to reduced inventories on dealer lots. However, auto sales in Canada should not be greatly affected, as non-Japanese auto manufacturers could meet demand.