Earthquakes in Japan. Nuclear reactors in meltdown. Governments getting overthrown in the Middle East. A war starting in Libya, from which the Western powers may find it very hard to extricate themselves. Geopolitical news has been coming thick and fast in the last few weeks. And the financial markets have whiplashed in one direction and then another as they try to make sense of what is happening. But, in fact, investors should keep in mind the popular World War II poster that came back into fashion at the height of the credit crunch: keep calm and carry on.
The events in Japan were a sobering reminder that sudden natural disasters can affect a whole country. The earthquake has killed thousands of people. The sight of an exploding nuclear reactor understandably made people very nervous. Japanese factories in their hundreds have had to shut down. We still don’t know precisely what the impact on global supply chains will be – you can’t sell anyone a car with only 90% of its components in it. If some of Japan’s huge manufacturing companies can’t get themselves back up and running quickly, then GDP is going to take a bad hit – not just in Japan but elsewhere as well.
Still, getting some perspective on all of this is in order. While the loss of life from the earthquake and the tsunami may be terrible, for a country of 125 million people it is hardly terminal. And there is very little evidence so far of nuclear radiation spreading beyond a relatively small area. At the time of writing, the authorities appeared to be getting the situation under control. If any nation has the technical skills to deal with the problems, it is probably Japan – it is, after all, one of the most advanced scientific and engineering nations on earth.
A similar positive view can be applied to the Middle East. Sure, the toppling of regimes and a nasty war in Libya poses risks to the world economy. The greatest concentration of oil exporters are in the region, and any serious disruption to the energy market has a tendency to hit the world economy hard. If the pumps get turned off, we’ll all feel the consequences of that pretty fast. But who says the oil will stop flowing?
Think about it. Regimes such as Saudi Arabia could be in big trouble if they don’t keep their people happy. The only real way they can survive is to keep spending more money – and they can only do that by pumping more oil. The worst thing they could do would be to reduce the living standards of their residents. If new regimes come to power, they too will have to keep the oil wells running. Most of these countries don’t produce anything else that the rest of the world wants very much, so oil is their lifeline, more or less.
Even a prolonged war in Libya isn’t going to be the end of the world. The country pumped 1.59 million barrels of oil a day in January – about 2% of global output. Even in the midst of the current rebellion, Libya has still been producing around 400,000 barrels a day of oil. The one thing we know for sure about war is that it is very, very expensive. So long as fields, pipelines and terminals aren’t directly on the battlefield, both sides will want to keep them running as fast as possible. How else are they going to pay for the guns they need?
The truth is, single disasters – no matter how much they dominate the news – don’t make much impact on GDP figures. A study by the economist Ilan Noy looked at the difference that major natural disasters had on subsequent output, and found they did far less damage than you might suppose. “There is no evidence from recent data that even large natural disasters have any measurable adverse impact on the national economy of rich developed countries such as Japan,” he concluded.
Long-term growth rates are actually very, very hard to shift – as the failure of countless government programmes to get economies growing faster makes clear. The most important determinant of medium-term growth is first and foremost demographics. How many people you have, and how old they are, makes a big difference to what you can produce. That is swiftly followed by technological progress, and the rate of saving. How much capital is around, and what people do with it matters as well. Factors such as expanding global trade, and bringing down tariffs and taxes, can also have a pretty big impact. At the margins, education may play some role – smarter people are usually more productive. None of those conditions change in anything other than the very long term.
So whatever happens in Japan, it will remain a rapidly ageing country, yet one with formidable technical skills. In short, it will remain prosperous, but won’t grow very fast. And whatever new regimes get installed in the Middle East, most of those countries will remain poorly educated autocracies, with little in the way of industry. And no real means of supporting themselves except by selling as much oil as they can pump out of the ground.
The best thing investors can do is switch off the TV, ignore all the noise – and just wait for the world to get back to normal. Anyone who starts buying and selling on geopolitical news will only lose money.