The disaster in Japan has caused immeasurable human toll but as more numbers from March and April are released, its economic impact may prove less dire than first expected, at least for the rest of the world.
A few weeks after the earthquake and tsunami hit the northeastern coast of Japan, analysts rushed to predict the economic toll of the disaster. The World Bank estimated the loss to be at least $235 billion while Capital Economics cut its forecast for Japan’s GDP growth to zero from 1 percent.
“Initial predictions are often overblown,” said Bill Witherell, chief global economist of Cumberland Advisors. “It is often the case that a natural disaster’s effect on a nation’s economic growth turns out to be less than expected.”
Still, the crisis has had a significant impact on productivity in Japan. In March, the nation’s PMI dropped to 46.6 from 52.9, the largest month-to-month decline ever recorded. Productivity contracted further in April to 46.4, which is the lowest in two years.
The country depends mainly on its trade surplus, but it saw its exports shrink by 2.2 percent in March for the first time in 16 months while its imports surged by 11.9 percent. Exports continued to decline by 19.4 percent in the first half of April, which prompted the Japan Foreign Trade Council chairman Shoei Utsuda to predict that April may see the country’s first trade deficit since January 2009.
Despite its slow growth, Japan remains the world’s third largest economy and still significantly affects the JPMorgan’s Global Composite PMI, which declined to a six-month low of 54.7 in April. JPMorgan predicts that without the sharp contraction of Japanese productivity, the index would have registered at around 57.3 instead.
Witherell believes the decline in global PMI will be short-lived. “It is likely that any slack left by the contraction in Japanese productivity will be picked up by its competitors, so it is unlikely that there will be any major impact of the disaster on global economic growth,” he said. “The crisis here is very much a Japanese one.”
As for the U.S., its PMI declined to 60.4 in April from a 27-year high of 61.4 in February, although the decline may be due to higher commodity prices instead.
The numbers for U.S.-Japan trade following the crisis hasn’t been released, but other indicators seem to show U.S. exports to Japan haven’t been adversely affected.
“Japan still needs what we ship to them, mostly chemicals, agriculture and other food stuff, while Japanese imports to the U.S. mostly consist of components and electronics that are not necessities, so we will see companies buying them from elsewhere to keep production going,” said Russell Price, senior economist of Ameriprise.
The U.S. livestock industry may even benefit from the crisis. The areas affected by the disaster amount to about 2 percent of the Japanese economy, but they make up 12 percent of beef production and 16 percent of pork.
Japan is already the largest importer of U.S. pork and the third largest of U.S. beef in value, consuming mostly premium cuts. In February, U.S. beef exports to Japan have increased by 75 percent in February year-to-year while pork exports increased by 27 percent.
“Japan mostly buys chilled not frozen products and those spoil more easily, so there was more urgency to get them to the end user,” said Jon Schuele, spokesperson for the U.S. Meat Exports Federation (USMEF). “So we did see a drop in sales during the crisis, because of issues with infrastructure and transportation. People weren’t sure they could get the products to the consumers.”
Sales have rebounded since then and are resuming their growth trajectory from before the disaster. USMEF predicted in January that total meat exports to Japan would grow by 23 percent this year, which will not be revised despite the crisis.
The disaster was also predicted to hit the auto industry hard, mostly by causing disruptions in the supply chain. Toyota reported that its output had been cut by more than half and that they will not regain normal production until the fourth quarter. Honda predicted that its output would remain at about half its original until the end of June at the soonest.
But General Motors (GM) may be benefiting from the supply gap left behind by its Japanese competitors. Their U.S. sales surged by 26.4 percent in April while its first quarter earnings tripled from last year. Credit Suisse analyst Colin Langan wrote in a report that the crisis in Japan is the catalyst that GM needed to regain its feet in the market.
Despite a 7.7 percent dip in April sales from March, the auto dealer industry is optimistic that the effect of the Japan disaster will be made up for in the long run. The National Automobile Dealers Association (NADA) predicts a 20 percent growth this year with April already seeing a year-to-year increase of 17.7 percent.
“A small percentage will wait for the models they want, but the majority of people simply need a car and they will buy the models available,” said Albert Gallegos, international industry analyst for NADA. “It’s just demographics; there are more people in the market and there is pent up demand after two years of low sales. Whoever can meet that demand, wins.”