Tragic Echo

18/03/2011 at 3:52 pm

Markets this week were inevitably dominated by the unfolding crisis in Japan. Though the worst of the panic seems to be over for now, with equity and commodity markets off their lows, there is still much uncertainty over the likely impact of the disaster on the Japanese and wider global economy.

One of the thoughts we shared with our clients on the situation this week was that there were parallels with the earthquake and tsunami suffered by Indonesia in 2004:

Rather uncannily, [the 2004 disaster] also occurred as the world was exiting a period of subdued growth in the wake of the TMT collapse. There were similar, terrible pictures of natural devastation. Over 200,000 people are estimated to have lost their lives – one measure by which the ’04 event was even more devastating than last Friday’s (another being the magnitude of the quake itself).

In ’04 the epicentre of the quake was just off the coast of Indonesia, which accordingly bore the brunt of the losses. Analysis of the economic impact on that country, however, throws up some surprising facts:

  • Despite the devastation of coastal communities (and related activities such as fishing), there was no interruption to Indonesian GDP growth at the aggregate level, which came in 6% in real terms for Q1 2005 and 5.9% higher for Q2.
  • The effect on unemployment was similarly muted, with the rate increasing by about 1% (to 11.2%) by October 2005 and falling back to 10.3% by the following July.
  • For local markets the biggest drama was the currency, with the rupiah off 15% against the USD at its nadir in H2 2005. This fed through to CPI – though both the currency and inflationary effects settled down in 2006.
  • While the local bond market suffered, reflecting the spike in inflation, the equity market strengthened both during Q1 ’05 and across the year as a whole, in part a response to returning strength in world markets.

This is all the more remarkable when we consider that Indonesia suffered another huge earthquake (magnitude 8.6) on 28 March 2005.

Thankfully, while the human cost of the last few days has been terrible and sobering challenges for the Japanese remain, it now seems as if their economy may indeed emerge relatively unscathed.

With events in the Arab countries to consider as well, 2011 has got off to a convulsive start. Let us hope that Japan and the rest of the world may now look forward to calmer times ahead.


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