Soft Spot or End of the Upturn?

Over the last two quarters BPA Consulting has been reporting how cyclical leading indicators in the electronics industry have decelerated and have turned down from their peaks in all regions of the world. More evidence is pointing to a loss of momentum in the world upturn and there are a number of factors, which are increasing the downside risks. The first of these is the continuation of the price of oil at levels above $50 a barrel for some time, which is raising manufacturing costs and squeezing profit margins. This seems to be translating itself into a faltering in confidence on the part of American consumers whose expectations for improved wages and job prospects are fading. Consumer behaviour could also be influenced by a potential fall in the overheated property/ housing markets prevalent in several regions of the world. Another factor is risk that China’s exceptional economic growth, a powerful driving force for the world in the last three years, might suffer a hard landing with strong negative repercussions in the rest of Asia. While the prospect for 2005 is still for solid growth worldwide recent forecasts have been revised downwards. All this is particularly worrying for Europe which, lagging behind the rest of the world, has not yet fully caught the momentum of the upturn being enjoyed elsewhere. Similarly figures from the electronics sectors have been less encouraging from the second quarter of this year, with deceleration evident in USA and Japan, while in Europe the climb towards solid growth is becoming ever more protracted. As electronics equipment has become an increasingly large part of most economies in the past 15 years its growth pattern has become more closely linked to that of the world economy as a whole. A look at what is going on the semiconductor sector is particularly revealing because of its high volatility and clear cyclicality. There was an intermediate growth peak at the beginning of 2003 followed by a two-quarter breathing period before growth rapidly accelerated mid-year, continuing until the end of second quarter 2004. Since then BPA have seen two months of sharp deceleration. In the last 20 years this magnitude of deceleration has only been seen after the cyclical peak has passed. The pattern of the intermediate peak followed by the main peak looks similar to the double peak pattern of previous cycles in the semiconductor sector. All this seems to indicate that world electronics has entered the deceleration phase of the cycle in the second half of 2004. BPA still expect positive growth in 2005 but at less spectacular rate worldwide. If Europe can continue to catch up growth may however be at a similar level to 2004 for this region. BPA Consulting are an international business consultancy specialised in evaluating market and technology opportunities in the electronics and optical industries. BPA assists many of the worlds OEMs, component and materials manufacturers in strategic planning, market assessments, commercial due diligence and market demand forecasting.