Japan, Libya crises won't derail recovery, unless...
A longer-than-anticipated shutdown of Japan's factories – or the spread of fighting in Libya to major oil producers – could stop a fragile economic recovery in the developed world.
The developed world's economic recovery was looking fragile even before the earthquake and tsunami hit Japan and revolt engulfed Libya. These twin crises have devastated those countries, rocked markets, and introduced new uncertainties into the world outlook.
Are they enough to derail the recovery?
From what is known so far, the answer seems to be no. But these twin crises reduce the margin for error that nations have in adapting to them or weathering another shock.
"Assuming that the unrest in the Middle East has peaked and that the Japanese nuclear crisis ends without a major radiation disaster, the US economy will continue to gain traction and recover," wrote Mark Zandi, head of Moody's Analytics, in a recent editorial. "But that’s provided nothing else goes wrong."
There are plenty of risks out there – sovereign debt problems, concerns about a slowdown in China, etc. Even within Libya and Japan, there are unknowns that could create far more havoc than buoyant stock markets in the United States and abroad seem to expect.
Take Japan. The nation is now grappling with the possibility that one of its reactors was breached and leaking radioactive material, a major setback. Even if the threat from the Fukushima Daiichi plant is stabilized, the ripples of trouble have only just begun.
There's the shocking loss of people: 10,000 confirmed fatalities, more than five times the toll from hurricane Katrina, and another 17,000 missing. That's a human tragedy and, from an economic point of view, a big blow in terms of lost skills and know-how.
Add to that the physical destruction, estimated at up to $309 billion by the Japanese government, which will cause its already record-high debt load to grow. Then there's the shutdown of damaged factories, which is already begun to affect auto manufacturers and makers of electronics and electronics components around the globe.
Even if the factories come back on line, there's no guarantee that they'll have the power to operate at full capacity. The earthquake and tsunami have taken down 12 gigawatts of nuclear power and damaged another 8 gigawatts of coal power for the next couple of months, estimates Jone-Lin Wang, a Washington-based power-generation expert at economic analysis firm IHS.
The temporary loss of 10 percent of the nation's electric power will be felt by homes and businesses alike, especially during the summer, when demand peaks. No amount of alternative energy sources and conservation can quickly make up the loss, she adds.
"The Japanese disaster will have a large but probably temporary impact on the Japanese economy," says Nariman Behravesh, IHS chief economist. But "if supply chain disruptions last a long time, the impact could become much larger."
The fighting in Libya creates similar uncertainty. Even if the turmoil there continues and, perhaps, spreads to other marginal oil producers, then the risks to the global economic recovery are unlikely to grow. Every $10 a barrel rise in oil could shave about half a percentage point off of world growth, Mr. Behravesh estimates.
That's not enough to stop world growth, estimated at 3.5 percent or more for this year, IHS forecasts. If disruptions spread to, say, a major producer, especially Saudi Arabia, all bets are off.
"If oil prices rise as high as $150 and stay there, then the global economy will be threatened," Behravesh says.