Global growth to take glancing blow from Japan

The economic damage wrought on Japan by its devastating earthquake and tsunami is likely only to shave a sliver off global growth, but it could mean increased inflationary pressures for a longer period.

As the world's third largest economy, any fall in Japanese GDP will have a knock-on effect globally, just by dint of gearing down one of its largest drivers.

It may also push some overseas borrowing costs higher as a result of Japan's repatriation of investments, possibly including their heavy holdings of US government bonds.

Forecasts are understandably scattered with so much uncertainty surrounding the damage in Japan, but it seems inconceivable that some impact will not be felt elsewhere, particularly in the region.

Paul Mortimer-Lee, head of market economics at BNP Paribas, said his firm estimated the disaster will shave 3% from Japan's projected GDP this year.

With the country accounting for around 6% of global GDP, that translates as about 0.2% of world economic output.

The IMF is forecasting global growth of 4.4% this year, so the drop is minor and there would appear to be little prospect of a new downturn.

Obama administration officials on Monday expressed confidence that the disaster would not delay the world's recovery from recession.

"These are still early days but ... we remain confident that Japan, and therefore the world, can deal with this crisis and respond and rebuild in a way that is good for Japan and good for the world," White House spokesman Jay Carney told a news briefing in Washington.

A smaller drop in Japan's quarterly GDP such as the 0.5 percentage point reduction in first-quarter economic growth penciled in by Nomura -- would have commensurately less of an impact globally.

But the impact is likely to be felt more in Asia, which has been driving the world economic recovery.

"You would expect production in Asia to be hit," said Mortimer-Lee.

Japanese automakers announced a string of plant shutdowns for several days, with Toyota Motor Corp estimating it would lose production of 40,000 vehicles.

Automakers around the world were canvassing their suppliers to prepare for possible parts shortages from Japan, and industry consulting firm JD Power and Associates told Reuters there could be a lagging effect on US sales by Japanese automakers as supplies of some models run short in the next few months.

Technology companies, also bracing for supply disruptions of semiconductors and silicon wafers from Japan, were scrambling to find alternate supplies.

China has been the star of recent global growth, with its manufacturing boom pulling the rest of the world along. That could now take a hit. Japan is the second or third largest destination of China's exports, depending on which estimates are used, and the largest source of China's imports.

Many of China's technology firms assemble or install Japanese-made components into finished products for export.

Imports from Japan to China totaled USD 176.8 billion last year while exports from China to Japan were USD 121.2 billion.

China also benefits from a significant amount of foreign direct investment from Japan.

Prices up down 

There is a mixed outlook for global inflation. At least for the short term, a slowing of global economic growth -- no matter how slight -- should ease inflationary pressures as seen by the sharp fall in the price of oil over the past few days.

That could lower one hurdle to continued global recovery, but for how long?

Producers facing supply disruptions can run down inventories for a sort period, but once demand recovers, they will have to start buying commodities again, triggering price rises. And this is even before the likely bounce back in demand for commodities that Japanese reconstruction will require.

Before the disaster, which includes devastating hits to its nuclear industry, Japan was already the world's third largest consumer of commodities.

"Oil imports will be increased in order to substitute some lost nuclear power. Given the already tightening oil market, this can have quite an important effect on (global) oil prices," Eliane Tanner, commodity strategist at Sarasin, wrote in a research note.

"Moreover, the global refined petroleum market is likely to tighten further given the outage of refinery capacity in Japan, which will hinder production of refined products."

Such a rise in demand and the accompanying energy price rises will do nothing to ease pressure on global central banks, most recently the European Central Bank, to consider tightening monetary policy.

Flip side

Partly as a result of expectations that regional Asian companies may benefit from the massive reconstruction drive that must now come, emerging market stocks rose on Monday, while most other indices headed south.

So here's the rub. Putting aside the huge human tragedy, there will be an offsetting effect to the disaster damage.

"Clearly you are going to see a disruption in supply," said Sarah Hewin, senior economist at Standard Chartered.

"We will see an initial impact on output and activity but it will be offset by the reconstruction effort."

But there is little doubt that the sheer scale of the Japanese disaster will be a shock to the global economy at least in the short term.

Also read: Japan quake may erode investor confidence: Moody's