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The Tsunami Mostly Spares Growth

2005-07-13 15:18

  Despite the staggering loss of life in Asia, productive capacity was only modestly damaged, and rebuilding would boost business

  The late-December tsunami ushered in 2005 on a somber note, with the death toll at over 140,000 and rising. Several million have been left homeless along the Indian Ocean coast, in particular in Indonesia's Aceh province and in Sri Lanka. The rebuilding, along with the immediate need for emergency food and medical assistance, will require a global relief effort.

  However, if one positive thing could be said in the aftermath, it might be this: It appears that disruption to economic output will be far less severe than the human devastation caused by the catastrophe. Even in the several countries most severely hit, the effects were largely restricted to the immediate coastal area, with relatively limited destruction to productive capacity. In Indonesia, for example, the oil and gas industry largely escaped severe damage.

  Despite the overwhelming destruction to certain coastal villages, the modest damage to nonresidential property - and therefore, productive capacity - was highlighted by the generally nonchalant reaction in stock markets across the region in the week following the event. Since the last trading day before the tsunami on Dec. 26, the Jakarta Composite Index on Jan. 3 was actually up 1.4% - outpacing the Hang Seng (+0.3%) and the Nikkei (+1.1%). Among the better performers were construction-related stocks, with an eye toward rebuilding. The Stock Exchange of Thailand (SET) slipped a hardly disastrous 0.3%.

  QUICK TOURISM REBOUND?  The one notable exception to the relatively sanguine outlook for the region's economies: Thailand's tourist sector. Its beach resorts, and most notably Phuket, suffered major damage from the tsunami, including loss of several thousand lives amid a major holiday week. The tourist sector accounts for approximately 6% of Thailand's gross domestic product. If we assume that the disruption subtracts 25% of business during the first quarter of 2005, this would shave about 1.5 percentage points from GDP growth during the quarter, perhaps offset by a couple of tenths of a percentage point in rebuilding efforts.

  As we at Action Economics had been assuming Thailand's growth at about 5% during 2005, the expected first-quarter disruption would leave GDP essentially flat from the previous quarter. Even assuming a quick resumption of GDP expansion at the previous pace, this would trim annual 2005 growth by 0.5 percentage points, to 4.5%, from our original forecast of 5%.

  Much would depend on tourists' willingness to return to Phuket, which we don't think will be a serious problem. Note Bali's relatively quick rebound after the bombing several years ago, where tourists perhaps had more to fear about than the probability of another disaster.

  COUNTERINTUITIVE BOOST.  The primary Indonesian resort areas, such as Bali, largely escaped from tsunami damage, along with the key resource-producing regions. Aceh province, which was devastated, accounts for only 1% to 2% of Indonesian GDP. After balancing the anticipated boost from rebuilding efforts, the net subtraction from Indonesian GDP in 2004 arising from the disaster will likely be smaller than the 0.5 percentage points seen for Thailand. We would still look for growth close to 5% in 2005.

  The counterintuitive result of a disaster actually boosting economic activity in some sectors is similar to what was seen with the Florida hurricanes. The gain GDP growth experiences is sometimes termed the "broken window effect," whereby the destruction of property doesn't affect the production process, while replacement activity does.

  American data revealed that construction is temporarily disrupted but then is boosted overall by events like hurricanes, while sales at the retail level actually gain steam due to stronger demand for some goods. Factory and transportation disruptions, as well as the impact on industries sensitive to tourism, dominate the negative effects on output.

  DUAL GROWTH ENGINES.  Like the rest of East Asia's economies, including Japan's, the 2005 GDP growth prospects for Indonesia and Thailand will likely depend more on the extent to which global export demand can get back on track, after sputtering during the second half of last year, than on the tsunami.

  These export-driven economies will continue to look to the U.S. and China as the dual engines of world growth. By our estimates, the outlook is positive for the two leaders to continue fulfilling this role in 2005. Barring some sort of geopolitical shock that could set oil prices higher and threaten to derail the global expansion, such growth would be welcomed in nations now undertaking the arduous task of rebuilding tsunami-devastated areas.

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