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Saturday, June 28, 2003

US Recovery, Perhaps the Only Thing Left is Hope

Eddie doesn't seem to be getting much rest in Singapore these days. Now he's taking time out to examine the US recovery situation and the role of tech investment.

THERE'S a lot to hope for, it seems.

The Iraq war is over and the Sars virus subsided quicker than expected. There's relief all round. As United States Federal Reserve chairman Alan Greenspan testified before the US Congress last month, 'expectation for a pick-up in economic activity is not unreasonable'. And the maestro isn't just twiddling his thumbs while waiting for the forecast to unfold. In the past month, Mr Greenspan has engineered a startling drop in US long-term interest rates and a surprisingly large narrowing in the spread between all grades of corporate and government treasury bonds. What is remarkable is that he achieved this loosening of credit conditions before using his main tool, the federal funds rate.

Nobel Prize-winning economist Robert Solow was right when he reasoned in a Los Angeles Times article two weeks ago that, 'one of the good things' left is the US Federal Reserve's flexibility and 'its willingness to think outside conventions'. We are clearly in a unique situation.

The vexing question is: Why hasn't the large cut in interest rates boosted demand as it did in the past?

But first, it is necessary to correct an inaccurate impression. What seems to have been overlooked is that this long-awaited recovery in US investment has actually half arrived. Investment in technology is up, although the rest of manufacturing is still struggling. During the recent three quarters, US investments in computers and peripherals grew at an average rate of 26 per cent. The rate of investment in the first quarter of this year was 24 per cent higher than its previous all-time high reached during the peak of the Internet boom in the late 1990s.

The reason why the technology revival hasn't felt like a recovery in the US is that technology deflation remains vicious. While computers and peripherals are still being bought at a furious pace, they aren't worth as much, and what counts for the bottom line is the value of the investments. Unfortunately, average growth in monetary terms was just 9 per cent during the past three quarters. In fact, weak prices mean the value of investment in computers and peripherals is still some 20 per cent below the peak reached amid the Internet boom three years ago.

But Asia fared better, benefiting from the relocation of production and the outsourcing trend. Singapore's exports of electronics goods rose by almost 9 per cent in the recent three quarters, a decent turnaround after contracting 21 per cent in 2001. Exports of integrated circuits, in particular, jumped 30 per cent. Other Asian economies did better. Thai exports of high-tech goods have been growing an average 19.2 per cent since the middle of last year, while China's computer exports soared 54 per cent last year.

Mr Terence Tan, regional technology analyst with DBS Vickers Securities, says that while there were still some weak sectors in technology, like telecommunications, many Singapore technology companies actually made record profits last year. Unisteel Technology, which supports the disk-drive industry, enjoyed a 62 per cent rise in profits last year on the back of a doubling of revenues. Mr Tan says such companies did well because 'while downward pricing pressures are always present for technology products, this was more than made up by a surge in volume production'. The end demand for disk drives was 'exceptionally strong'.

But he's less optimistic about the outlook, saying: 'It will be hard to sustain already high growth rates.' In other words, this is probably about as good as it gets. Sure, investments in technology are likely to dip in the second quarter of this year and will be made up with a revival in the third quarter. But is it reasonable to expect a significant acceleration? Some of the weak sectors could see a pick-up in growth, but others will find it hard to replicate already robust growth.

So what is Asia waiting for in the second half of the year? Consider the implications of the diverging trends in technology investments. If the US is installing a lot more computing power, that suggests that businesses are still finding value investing in information technology. Quite likely, the rapid growth in productivity the US is enjoying will continue. But this doesn't guarantee that we will see a surge in growth soon. Instead it could suggest that downward price pressures will persist as productive capacity continues to outpace demand. Profitability for Asian manufacturers could come under pressure. The pie just isn't growing very quickly.

After 16 years of massive computer proliferation in workplaces, computer and peripheral manufacturers attract no larger a share of US gross domestic product (GDP) in spending than they did back in the days when singer Rick Astley topped the pop music charts and Ronald Reagan was US president - about 7 per cent of GDP. This trend isn't about to change and could get worse. In a survey of more than 600 chief information officers (CIOs) worldwide earlier this year, Mr Richard Hunter, a research fellow at technology research firm Gartner Inc, reported that, 'CIOs, after years of being asked to do more with more, are being asked in a serious way to do more with less'. The CIOs' top priority is to cut costs, says the survey.

It is going to take something pretty special in the second half of this year if the world is to get what it is waiting for. Perhaps it's better just to hope.
Source: Straits Times Author: Eddie Lee

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