Japan Quake May Cut Global Growth to 3.8%, Morgan Stanley Says - Bloomberg

Japan’s worst disaster since World War II likely won’t “derail” worldwide economic growth, as the crisis cuts global expansion this year by 0.5 percentage point to 3.8 percent, according to Morgan Stanley.

The March 11 earthquake and tsunami that killed more than 8,000 people and crippled a nuclear power plant may “push the Japanese economy into a short and deep recession,” causing gross domestic product to contract as much as 3 percent in 2011, compared with a forecast before the disaster of 2 percent growth, Morgan Stanley economists wrote today in a research report. The economy may increase as much as 3 percent or shrink by 1 percent the following year, they wrote.

The global recovery will likely withstand turmoil in the world’s third-largest economy because conditions were “relatively robust” going into the crisis and because governments and central banks may increase support for growth if needed, Morgan Stanley economists Joachim Fels, Manoj Pradhan and Spyros Andreopoulos wrote. Disruptions to Japan’s exports, transportation and output on the global supply chain is “the biggest uncertainty,” they wrote. The economists didn’t respond to a phone call seeking further comment.
Favorable Conditions

“With initial conditions for the global economy relatively favorable going into the shock, and policy makers likely to provide more support if needed, the overall impact on world growth should be modest,” Morgan Stanley said. “Spillover to the rest of world should be relatively limited.”

The crisis may affect the other economies via goods and services trade, capital flows, financial system contagion and commodity prices, Morgan Stanley said. The decline in Japan’s gross domestic product may lead to about half, or 0.25 percentage point, of the estimated cut to 2011 global economic growth, while the rest of the reduction reflects “negative spillovers.”

Global growth may also be interrupted by rising oil prices stemming from unrest in the Middle East and countries such as Libya, monetary tightening in emerging markets to stem rising inflation and contagion from Europe’s sovereign debt crisis that spreads to the U.S. and other developed countries, Morgan Stanley said.

To contact the reporter on this story: John Detrixhe in New York