Global economy 'likely to withstand turmoil'

Japan's worst disaster since World War II is unlikely to "derail" worldwide economic growth, as the crisis cuts global expansion this year by 0.5 percentage point to 3.8 per cent, according to Morgan Stanley.

The March 11 earthquake and tsunami that killed more than 8000 people and crippled a nuclear power plant might "push the Japanese economy into a short and deep recession", causing gross domestic product to contract as much as 3 per cent this financial year, compared with a forecast before the disaster of 2 per cent growth, Morgan Stanley economists wrote yesterday in a research report.

The economy might increase as much as 3 per cent or shrink by 1 per cent the next year, they wrote.

The global recovery was likely to withstand turmoil in the world's third-largest economy because conditions were "relatively robust" going into the crisis and because governments and central banks might increase support for growth if needed, Morgan Stanley economists Joachim Fels, Manoj Pradhan and Spyros Andreopoulos wrote.

Disruptions to Japan's exports, transport and output on the global supply chain was "the biggest uncertainty," they wrote. The economists didn't respond to a phone call seeking further comment.

"With initial conditions for the global economy relatively favourable 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 might affect the other economies via goods and services trade, capital flows, financial system contagion and commodity prices, the report said.

The decline in Japan's gross domestic product might lead to about half, or 0.25 percentage points, of the estimated cut to 2011 global economic growth, while the rest of the reduction reflected "negative spillovers".

Global growth could 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 spread to the US and other developed countries, Morgan Stanley said.

- BLOOMBERG