In the first of two installments, we examine the global issues facing the semiconductor industry, as released by Linx Consulting in The Econometric Semiconductor Forecast. Part two predicts that semiconductor growth should recover by 2014.
United States’ economic outlook
The January 1st “fiscal cliff” deadline in the US dominates the near term outlook for the world economy. ANY settlement will stabilize the situation, but any politically acceptable near term agreement in Washington will not be enough to truly begin to solve the longer-term problems. The political dynamics are not yet in place to lead to a long-term solution to debt restructuring or reducing excessive growth in entitlements. The first fiscal cliff compromise, which includes higher taxes on the wealthier income-earners, elimination of the 2% social security tax reduction, and a permanent fix to the alternative minimum tax levels, gave clarity to consumers on their tax situations. Discretionary and entitlement government spending controls or cuts to reduce government debt burdens were deferred, leaving key questions about policy to later negotiations. That extension of uncertainty will dampen investment spending and government purchases of equipment at least into the first half of 2013. Economic growth will stagnate in the beginning of the year, and then bounce briefly when the new policy environment becomes clear. Post bounce, the longer term issues will begin to re-surface, and economic growth should settle back into a sluggish trend that lags potential output. This modest growth will be slow to lower unemployment. Without a strong labor market, businesses will plan for very modest gains in consumer spending, relatively low inflation, and no significant change in interest rates.
Europe’s economic outlook
Most economies are in mild recession, as central governments raise taxes and/or cut spending in attempt to reduce debt. Austerity measures, coupled with potential national bankruptcies in Greece, and recessions in Spain and Italy which will likely extend into early 2014, produce severe stress on euro currency. For the euro to survive, Germany and the most troubled countries will need to compromise national needs to develop an approach that will satisfy financial markets. France introduces a growing uncertainty to the European outlook. It continues to head in the opposite direction from most countries, expanding the central government’s involvement in the economy, ignoring debt growth, and pushing income redistribution measures which could stifle growth. While the Eurozone should survive intact, the political process will likely keep markets uncertain and most countries’ fiscal budgets austere. Overall economic activity measured by real GDP most likely will contract slightly in 2013.
Asia’s economic outlook
With key developed world markets in recession or growing weakly, Asian economies will have difficulty producing strong expansions in 2013. With the exception of Japan, however, rates of growth are likely to improve from 2012. Led by China, which moved a bit too aggressively to cool its economy in 2012, policies have become slightly more expansive across the region and should produce slightly stronger real growth rates. Growth will come more from internal regional development than export-led growth.
Risks affecting the semiconductor industry
Negative risks dominate discussions among serious analysts. In Europe, a financial calamity from either a banking system failure or the breakup of the Eurozone would produce a severe recession with global implications. In the US, an imbalanced solution to the fiscal cliff could stifle growth and tumble the economy into a brief recession. Emerging commodity-focused or dependent economies would be negatively impacted by a weaker Asian expansion. Positive risks, which get very little discussion in popular press these days, include a much sharper boost in the US following a settlement of the “fiscal cliff” dilemma, and a slowly improving European situation (most likely led by Germany or a group of northern European economies) that stabilizes more rapidly the fiscal situation in Europe. A number of US forecasters surveyed by the National Association for Business Economics on December 17th expect US growth to rebound sharply and exceed 3 ½% by the end of 2013 as the uncertainty “discount” is removed from markets. While an equal number expect growth to stagnate around 1%, the upside should be at least acknowledged as a possible upside risk to the current consensus.