Analysis: Japan disaster to deal glancing blow to global growth

LONDON (Reuters) - The economic damage wrought on Japan by its devastating earthquake and tsunami is likely only to shave a sliver off global growth, but it could mean increased inflationary pressures for a longer period.

As the world's third largest economy, any fall in Japanese GDP will have a knock-on effect globally, just by dint of gearing down one of its largest drivers.

It may also push some overseas borrowing costs higher as a result of Japanese repatriation of investments, possibly heavy holdings of U.S. government bonds.

Forecasts are necessarily scattered with so much uncertainty surrounding the damage in Japan, but its seems inconceivable that some impact will not be felt elsewhere, particularly in the region.

Paul Mortimer-Lee, head of market economics at BNP Paribas, said his firm estimated the disaster will slice 3 percent from Japan's projected GDP this year.

With the country accounting for around 6 percent of global GDP, that translates as about 0.2 percent of world output.

The IMF is forecasting global growth of 4.4 percent this year, so the drop is minor and there would appear to be little prospect of a new downturn.

A smaller fall in quarterly Japanese GDP -- such as the 0.5 percentage point reduction in first quarter economic growth penciled in by Nomura -- would have commensurately less of an impact globally.

But the impact is likely to be felt more in Asia, which has been driving the world economic recovery.

"You would expect production in Asia to be hit," Mortimer-Lee said.

China has been the star of global growth, with its manufacturing boom pulling the rest of the world along.

That could now take a hit. Japan is the second or third largest destination of China's exports, depending on which estimates you use, and the largest source of China's imports.

Imports from Japan to China totaled $176.8 billion last year while exports from China to Japan were $121.2 billion.

China also benefits from a significant amount of foreign direct investment from Japan.

PRICES UP OR DOWN

There is a mixed outlook for global inflation. At least for the short-term, a slowing of global economic growth -- no matter how slight -- should ease inflationary pressures, as seen by the sharp fall in the price of oil over the past few days.

That should take one hurdle away from continued global recovery. But for how long?

If any significant sector of manufacturing is slowed by supply issues rather than demand, it is likely to turn the other way.

Global companies from semiconductor makers to shipbuilders are already striving to minimize major supply disruption caused by the disaster.

One typical response to supply line blockages would be for manufacturers to run down inventories. When that is over, demand starts to outweigh supply, triggering price rises.

This is even before the likely bounce back in demand for commodities that Japanese reconstruction will require.

Before the disaster, which includes devastating hits to its nuclear industry, Japan was already the world's third largest consumer of commodities.

"Oil imports will be increased in order to substitute some lost nuclear power. Given the already tightening oil market, this can have quite an important effect on (global) oil prices," Eliane Tanner, commodity strategist at Sarasin, wrote in a note.

"Moreover, the global refined petroleum market is likely to tighten further given the outage of refinery capacity in Japan, which will hinder production of refined products."

Such a rise in demand and the accompanying energy price rises will do nothing to ease pressure on global central banks, most recently the European Central Bank, to consider tightening monetary policy.

FLIP SIDE

Partly as a result of expectations that regional Asian companies may benefit from the massive reconstruction drive that must now come, emerging market stocks rose Monday, while most other indices headed south.

So here's the rub. Putting aside the huge human tragedy, there will be an offsetting effect to the disaster damage.

"Clearly you are going to see a disruption in supply," said Sarah Hewin, senior economist at Standard Chartered.

"We will see an initial impact on output and activity but it will be offset by the reconstruction effort."

But there is little doubt that the sheer scale of the Japanese disaster will be a shock to the global economy at least in the short term.

And it will do little to help build confidence among skeptical consumers and investors that the world economy has put years of crisis behind it.

"This new crisis adds to the geopolitical/oil crisis already in the background of global markets. This should contribute to global risk aversion in the near future," Societe Generale said.

(Editing by Mike Peacock)