Japan’s struggle to avert a nuclear disaster and prepare for a reconstruction of epic proportions is one more risk for a global economy already grappling with mounting risks.
The threats to the fragile recovery were already rising before the devastating earthquake and tsunami brought the world’s third-largest industrial economy to its knees.
And they span the globe – from conflict and oil disruptions in the Middle East and rising inflation in China and other high-growth emerging economies to continuing debt woes in Europe and persistent weakness in U.S. housing and employment, whose recovery is essential to any sustained U.S. rebound.
Adding to the wall of worry, governments have pulled the plug on massive stimulus programs, which played a crucial role in turning around economic fortunes in the wake of the 2008 financial meltdown and ensuing recession.
In their place have come a wave of austerity measures and tighter monetary policies, forced by financial circumstance, political pressure or, in the case of China and India, fears of runaway inflation.
Put it all together and “there is no logical reason” why the global economy will not slow markedly this year, warns Robert Kessler, head of Kessler Investment Advisors in Denver, who advises large corporations and institutions around the world on U.S. Treasury bond investments.
The green shoots of recovery that sparked optimistic forecasts last summer have been buried by a dark winter of growing geopolitical and economic discontent.
“Some time in the next few months, we will be seeing brown shoots again,” Mr. Kessler says. “You have a world that is going through a tremendous amount of turmoil.”
Unrest in Libya and the Middle East has sent oil prices soaring, triggering concerns about high costs hurting a host of industrial sectors. “Persistent high oil prices around $100 a barrel will weaken the global economic recovery,” hitting the auto industry, agriculture, airlines and travel in particular, said a report Friday by Moody’s Investors Service.
Since exiting the recession, the global economy has relied in no small part on China’s roaring growth, but worries about continued rapid expansion are increasing. The country is taking steps such as raising interest rates and cooling lending to tackle inflation and slow the economy, setting a long-term growth target of 7 per cent. That’s still strong, but a far cry from the 11 per cent range seen in recent years.
In the U.S., recent signs point to an economy on a firmer footing. But a recent dismal showing for U.S. housing starts this week showed how serious trouble spots remain that could send the rebound off course.
“It is hard to believe, looking at the housing data and understanding the sector’s importance in driving growth for the entire economy … that we can end up having much of a recovery during periods where there is scant government stimulus,” David Rosenberg, bearish chief economist and strategist with Gluskin Sheff + Associates Inc., says in his latest note to clients.
“A sharp slowing in global GDP in the second half of the year cannot be ruled out.”
The long-troubled Japanese economy accounts for about 6 per cent of global GDP. The economy shrank in the fourth quarter, and analysts now calculate that the crisis will translate into at least two more quarters of contraction, after which massive spending on reconstruction should kick in.
Whether Japan’s disaster becomes the straw that breaks the struggling camel’s back depends on Tokyo’s ability to contain the nuclear crisis. One worst-case analysis pegs potential economic losses from the nuclear fallout at ¥7.4-trillion ($92.1-billion), just under half the conservative estimates of the damage caused by the earthquake and tsunami. Estimated reconstruction costs run anywhere from ¥10-trillion to ¥20-trillion – about 4.2 per cent of the economy.
