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Tsunami likely to affect economic recovery in short term

Japan The earthquake and tsunami that ravaged Japan Friday will likely have a short-term effect on the global economy, shutting down Japanese factories, ports and oil refineries, but it won't derail the economic recovery, observers say.

The 8.9-magnitude quake in Japan, the world's third-largest oil consuming country, forced the closure of all of the country's ports and five of its large steel mills. Car companies such as Nissan said they were closing factories until Sunday and airlines canceled flights to the country.

The quake comes a day after the Dow Jones industrial average fell below 12,000 for the first time since January on worries about slowing Chinese export growth, the widening U.S. trade deficit and the downgrading of Spain's debt. On Friday, the Dow was down 26.53, or 0.22%, as of 11:13 a.m. EST, and oil prices experienced their steepest drop in seven weeks, briefly dipping below $100 a barrel.

Photos: Scenes from the earthquake and tsunami

It may seem that world events such as the turmoil in the Middle East and the Japanese tsunami are conspiring to offset the economic recovery, but the reality is that the recovery is slow because businesses are not redeploying profits rapidly, said Diane Swonk, chief economist at Mesirow Financial. Continuing cuts to local and state governments in the U.S. are further adding to uncertainty.

"The reality is, if the economy was growing 8-9%, these things would be little more than noise, but they get magnified in a recovery that is very uneven," she said. "When you’re on thin ice, you don’t need any extra headwinds."

Still, there will be some short-term implications. Airlines have canceled flights to Japan. Production was halted at two Honda plants and at two Toyota plants, and Nissan Motor Co. halted production at five plants, according to the Associated Press.

Videos of the earthquake

Damage to steel mills might last longer. If the steel mills remain closed, demand for iron ore will drop by 20 million tons, said Jeffrey Landsberg, managing director of Commodore Research & Consultancy in New York. That will primarily affect the Australian iron ore industry and the miners there. It could also create demand for more steel from China.

Further, shipping companies might redirect their vessels as they wait to see if aftershocks and further tsunamis come after Friday's quake. In addition, if Japan's nuclear plants are shut for an extended period of time, the country will need to consume more coal, a commodity that is already at historically high prices.

Still, Landsberg said, these events are relatively small in a global perspective.

"This is more than anything, a temporary event," he said. "I don’t think its that long lasting impact on global recovery."

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-- Alana Semuels

Photo: An oil refinery on fire in Japan. Credit: EPA/STR

 
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