Challenges of the 2-Speed Economy

Global economic and political leaders have a major problem on their hands: how to balance the differing growth rates of developed and emerging economies. The first group is steeped in the doldrums of high unemployment, slow growth, banking crisis and a deepening search for relevance; while the second is overheating, suffers from limited local demand, and high dependence on exports and lacks both the expertise and the sophistication to navigate a looming inflationary crisis.

The electronics sector isn't immune from the problems facing the larger economy. Certainly, as Malcolm Penn, CEO at Future Horizons points out, the semiconductor market in 2011 should post healthy growth, albeit more slowly than the forecast 30 percent-plus expansion from 2010. (See: Stop Agonizing: 2011 Will Be a Strong Year.) As we saw during the last banking and real estate crisis of 2008, whatever ails the global economy will crimp demand and hurt sales in the electronics industry.

Here are the unfolding dynamics as the International Monetary Fund sees it: Developed economies are still hurting despite efforts by regulators and politicians to revitalize their systems. In Europe, a slow-spreading debt crisis was initially warded off with billions in bailout loans by governments and central bankers; but several countries, including Greece, Ireland, Portugal, and Spain, are still in danger.

Will further bailouts help? The Economist does not think so. It took the unusual action of saying the debts of some of these countries should be renegotiated. In other words, they should move towards bankruptcy to limit the inevitable negative impact on other EU member nations. Better, it seems, to sacrifice the bad apples in the bunch. Right?

The following is how The Economist argues its case:

This mess leads to a depressing conclusion: Europe's bailout strategy, designed to calm financial markets and place a firewall between the euro zone's periphery and its center, is failing. Investors are becoming more, not less, nervous, and the crisis is spreading. Plan A, based on postponing the restructuring of Europe's struggling countries, was worth trying; it has bought some time. But it is no longer working. Restructuring now is more clearly affordable than it was last year. It is also surely cheaper for everybody than it will be in a few years' time. Hence the need for Plan B.

That position is very close to the one being advocated by the IMF. "The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally," the world body said in a Jan. 25 update to its World Economic Outlook and the Global Financial Stability Report.

The IMF arrived at its own conclusion by reviewing current growth forecasts for developed and developing economies. The data shows "advanced economies are projected to grow by 2.5 percent in 2011, with emerging and developing economies seeing growth of 6.5 percent, against 7.1 percent last year," the IMF said.

The average growth rates for developed and developing nations mask some important distinctions on a country-by-country basis. US economic growth rate for 2011 is forecast at 2.5 percent versus 3 percent in 2010, while the Euro area is predicted to expand a piddling 1.5 percent this year versus last year's 1.8 percent. By contrast, China is seen dropping slightly to a still sizzling 9.6 percent vs. 10.3 percent in 2010; India 8.4 percent compared with 9.7 percent; and the Association of Southeast Asian Nations (ASEAN) region 5.5 percent, down from 6.7 percent.

World Economic Growth

The two-speed growth rate is generally not good for the global economy. While regional and national economies are unlikely to expand at the same rate, lack of growth in one region and unsustainable expansion in another is bad news for everyone. China, for instance, is still a major exporting nation despite rising local consumption, and a slowdown in demand from the West will eventually hurt its economy.

Reports today that the US economy performed even worse than expected in the fourth quarter should offer a cautionary warning for electronics manufacturers who are expecting strong growth for 2011. Real gross domestic product in the US increased 3.2 percent in the fourth quarter compared with expectations for 3.5 percent, according to the Commerce Department.

In such a climate, it would make sense for electronics manufacturers to ramp up sales to developing economies while keeping a close eye on numbers in developed nations. It won't hurt, also, to keep a tight leash on costs and prepare for all possible scenarios, best case and worst case, included.