David Prosser: The stock market is a poor guide to the consequences of Japan

Outlook Stock markets do not do proportionality: their world view is black and white (or blue and red in the context of risers and fallers). We should not be surprised, therefore, by the way the dramatic falls on the Japanese stock market yesterday triggered sell-offs in so many other markets around the world. But nor should we make the mistake of thinking they were accurate reflections of what the terrible events in Japan might mean for the global economy.

It is not yet clear what theeconomic implications of thisdisaster will be. For one thing, the catastrophe is ongoing and the nuclear dimension has such calamitous potential. It is also fair to say that, for the global economy, the earthquake could scarcely have come at a worst moment, given the fragility of the recovery from the financial crisis of two years ago.

Still, any rational analysis of the contribution Japan makes to the global economy tells us that the horrors of the past few days should not derail that recovery. Remember, too, that there may be some positive economic implications – a dip in commodity prices as global energy demand falls back, for example, and a boost to growth as Japan rebuilds.

In the US, the world's biggest economy, exports to Japan, the most obvious area for the effects of the disaster to be felt, represent less than 1 per cent of gross domestic product. The loss of some of those exports would be a setback, but not one sufficient to throw the American recovery into reverse. Similarly, while many US manufacturers depend on Japanese suppliers for vital parts, which could spell production disruption, domestic suppliers will often be able to step in. The US, in short, will cope. In Europe, the picture is similar. Germany, the continent's biggest exporter, is most exposed to Japan's problems, which may be why its market saw the biggest sell-off yesterday. Still, Japan buys only 1 per cent of German exports, so the shock will be manageable.

Economic trade is not purely bilateral, of course, and Japan'sdifficulties may be more serious for Asia's economies, which would collectively add up to more significant woes for the West. Still, China and India, the region's two powerhouses, are less dependent on Japan than smaller economies such as Thailand or Vietnam.

On this basis, economists at IHS Global Insight said yesterday that they did not expect this disaster to knock more than 0.2 per cent off global GDP in 2011. Moreover, they then predict an equivalent boost to growth in 2012 as the reconstruction effort continues.

None of this is to downplay the horror of what has happened in Japan over the past few days – just to warn that the herd instinct of investors is rarely a useful guide to the significance, financially or economically, of any event, let alone something as emotionally compelling as this tragedy.