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Will High-Tech Lead as Economy Cools?

The outlook is cloudy for the global economy, and not even the most celebrated wizards in key economic positions in North and South America, Europe, or Asia know how things will play out over the next year. If you are not paying close attention to economic news because you are one of those who still subscribe to the idea that demand for — and supply of — electronics components and equipment won't be hit by factors extraneous to the industry, please get a second opinion.

The global economy is sinking slowly into turmoil and further uncertainties, with too many flash points, which precludes reasonably acceptable forecasts. Europeans are seething with rage over austerity measures; China is fighting a losing battle against inflationary pressures; Japan is troubled, both by the impacts of the recent earthquake and decades of subpar growth; the United States hasn't been able to put its financial and real estate mess behind it; and growth is highly uncertain and uneven in developing economies.

The bottom line is that there are very few calm economic spots worldwide. Germany, which might qualify, is unhappy it has to help bail out Greece, Ireland, and Spain and is looking to impose stringent conditions on the use of its funds. In the Middle East, several wars are brewing and civil unrest is reshaping the contours of the region, disrupting trade flow and hindering business activities.

The effects of the global malaise are already evident on the equity markets and commodity prices. Crude oil prices have been declining, a sign that traders see weaker demand ahead. Oil prices fell “below $90 a barrel, or more than 5 percent,” according to a report on Thursday following a decision by the International Energy Agency and the US government to dump emergency crude reserves on the market. The IEA said it was concerned about “sagging economies in the US and Europe.”

In the meantime, even the US Federal Reserve Open Market Committee (FOMC) is worried the global economy is not in full recovery mode. A report on iMarketNews.com noted that Fed chairman Ben Bernanke sounded “confounded by the economy” based on comments he made at a conference call after the FOMC released the summary of its deliberations and its decision to leave interest rates on federal funds at 0 to 0.25 percent. Here is how the FOMC tried to justify that decision:

    Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated.

    The Committee continues to anticipate that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Federal Reserve also pared back its growth forecast for the US, dropping this for the second time this year to between 2.7 and 2.9 percent; The prior forecast at the beginning of the year was for growth of 3.4 to 3.9 percent. Little wonder President Obama wants to redirect national resources from war in Afghanistan to nation-building at home.

What does these mean for the electronics industry? First, it will make some industry executives believe they were right in piling up cash and sitting on it rather than spending on new hires, increased R&D, and product development. But merely holding cash because the future is unpredictable is not a winning strategy in a fast-changing industry. The economy will bounce back, and the rough edges will get smoothed away eventually, but only those enterprises that planned ahead, carefully managing resources and the risks in the market, will emerge as winners.

Second, a cooling period can serve as the incubator for future growth. There are economic segments crying for high-tech to lead and champion the adoption and use of new technologies, especially in energy, connectivity, medical, and resource management. This is a great opportunity for an industry that is always searching for the next “killer” application.

The parts are already in place, but someone has to put them all together, and for this you don't need a guaranteed forecast from economists. Anyway, those numbers aren't coming anytime soon, from anyone.

7 comments on “Will High-Tech Lead as Economy Cools?

  1. DataCrunch
    June 25, 2011

    Bolaji, this article really makes you think, but as for hi-tech, I choose to remain optimistic. With the explosive growth of social media worldwide, people everywhere are feeling the need to stay connected, and the way to do that is through continued technology innovation (and hi-tech gadgets). If global green energy initiatives starting shifting into high gear, we could potentially see another tech boom. The demand is still there.

  2. Taimoor Zubar
    June 25, 2011

    I think I agree with Dave here. The reason why electronic industry will still be in demand is because of it's role in the basic necessities of everyday life. No communication is possible without electronic means and that's where there will be continuous demand for electronic components. Transportation is largely dependent on electronics and the industry will continue to demand components. Because of these and several other reasons I feel optimistic about the future of electronics industry and hi-tech companies despite the uncertainties in the global economy.

  3. Anand
    June 25, 2011

    But merely holding cash because the future is unpredictable is not a winning strategy in a fast-changing industry.

    Bolaji,

     I totally agree with you. There is famous saying “be fearful when others are greedy and greedy when others are fearful” . So I believe companies should now be greedy and try to invest in future technologies. No doubt economic outlook is bleak, but things will change and economy will bounce back once  the cooling period is over.

  4. FLYINGSCOT
    June 25, 2011

    I believe we are in a period of uncertainty where markets will bounce around the same level for at least 3 more years.  Electronics will follow this trend as consumer disposable income is squeezed at both ends by pay freezes and inflation.  Many people today (like school teachers and government workers) are on zero pay increases for the next two years but the cost of basic commodities like food and utiities continues to rise at an alarming pace.  I cannot see how people will freely purchase new 3D TVs, smart phones or PCs in these demanding times.

  5. Anna Young
    June 26, 2011

     

    It is evident from the global crisis that, things will gradually turnaround . Maybe not at the anticipated rate of growth (length of time it'll take is unpredictable)

    I think as the economy cools, electronics industry will see growth as the needs and demand for the new technologies in Energy,Medical and connectivity increases.

    I agree sitting on piles of cash by some industry will not encourage these turnaround and growth. It needs to be carefully managed and invested.

  6. Himanshugupta
    June 27, 2011

    Though the symptoms for global recovery are not good but there are no clear signs. Things are confusing enough and the problems in Europe are not helping too. Asia is struggling with high inflation so people here are struggling to meet their basic necessity but still spending on costly high tech items. 

    I think that companies were on hibernation mode until last year for past two years as there was job and hike freeze. They have started to accumate little bit of fat and i hope that the summer lasts little bit longer so that there is enough to survive the winter, if and when it comes.

  7. stochastic excursion
    June 28, 2011

    The article mentions low resource utilization.  This is one of the challenges of sustaining the industrial growth that has powered the world economy since the industrial revolution.  Resources that were once literally spilling from the ground in many cases require greater and greater investment to recover.  Also, the assets used in investments these days have a higher percentage of debt built in.  As the mortgage-backed securities crisis showed, sometimes bad debts can't be swept under the rug.  Someone posted that sometimes greed can be good when others are fearful.  However other times demand respect for the risk that debts can be called in.

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