It is a truth universally acknowledged that when natural calamities or geopolitical shocks happen, markets go into a tizzy and everyone rushes for safe havens. Then braver souls pour scorn on the wusses who are heading for the exits and buy on the dip, insisting that historic events such as 9/11 and Hurricane Katrina are barely noticeable in the grand progress of economic history.
Who’s right? Not a third of the way through 2011, we’re dealing with three enormous stories: the Arab Spring, the aftermath of the earthquake and tsunami in Japan, and Europe’s deepening debt crisis. Let’s look at the economic impact of each in turn.
Though the price of Brent crude oil dipped a little in mid-March, it’s still around a two-year high. Many take that as evidence that turmoil in the Middle East is going to hurt the global recovery, but I remain skeptical. I wouldn’t dismiss the war in Libya as a “sideshow,” as one analyst I trust does, but with about 2% of the world’s proven oil reserves, Libya just isn’t that big a deal in energy markets. Real unrest in Saudi Arabia would change my view, but so far the Saudis have shown themselves determined to keep a lid on protests.
The tragedy in Japan is another matter. It may knock around 0.5% off Japan’s growth in the first half of this year, which was never looking that robust. Tepco, the utility company that ran the doomed Fukushima Daiichi nuclear plant, will have to spend billions of dollars in cleanup and decommissioning costs, and billions more to compensate those who have lost jobs and homes. (The government has denied that it plans to take over the company, but Tepco’s stock is in free fall.) Japan bulls will tell you that rebuilding infrastructure in the northeast will boost the economy in time, but that is truly a case of looking for a pony in a heap of manure and about as edifying.
Over time, the main consequence of the earthquake will be felt in energy markets. Outside command-and-control economies such as China, the supposed “renaissance” in nuclear power just got tossed back into the Dark Ages. (Nuclear worries played a key part in the devastating defeat of Angela Merkel’s Christian Democrats in the German state of Baden-Württemberg on March 27.) Good for gas and coal; not good for tackling climate change.