Japan's Earthquake Recession

It was reported yesterday that Japan's economy shrank at a fairly rapid rate in the first quarter of 2011. Real output was down almost 1% during the quarter. This was in large part due to the effects of the earthquake; if significant pieces of your economy are simply not doing anything for a month, then of course the total output you produce during that time is going to be low. Some expressed surprise at the bad report, but even two months ago this GDP report was quite predictable.

The interesting question now, as Alphaphille suggests, is whether this will turn out to be a "temporary" recession. My answer is yes.

Two effects will mean that output in Japan will begin to recover quite strongly. First, manufacturing companies that were forced to stop doing business in the weeks after the quake are already trying to churn out extra output to make up for shipments that were delayed or missed in March and April. Countless manufacturing facilities around the world rely on inputs from Japan and were forced to slow or stop production as that flow of inputs stopped. (That's the likely explanation for the fall in manufacturing production in the US in April, by the way.) Now both the Japanese suppliers and their customers are scrambling to make up for that lost production.

Second, the Japanese government is slowly but surely embarking on a massive rebuilding effort in the affected area. This will probably amount to a fiscal stimulus of several percent of GDP in total. Even though this will be spread over the next few years, I think we'll already begin seeing significant effects of this stimulus in the second half of 2011.

One bright note: at least the disaster didn't happen in Austerityland, where politicians would probably respond by trying to cut government spending in the hope that confidence fairies would come to help in the rebuilding efforts...