Global Growth Trends Become More Uneven
Global economic trends continue to see gradual improvement, though the progress has become less steady. The developed economies remain the major drivers of global growth, but data from some of the regions have not met expectations. The U.S. economy expanded at a faster than expected pace during the third quarter, despite the uncertainties ahead of the government shutdown in October. However, most of the gains were due to rebuilding of inventories, which is difficult to sustain in subsequent quarters unless demand improves at a faster pace. The U.S. labor market appears to have been largely unaffected by the government shutdown, as suggested by the healthy job additions in October.
However, aggregate growth in both the Euro-zone and Japan for the third quarter fell short of expectations. The European Central Bank has lowered its benchmark rate further as inflation remains low, and has indicated further monetary steps if the economic recovery continues to be weak. The major emerging countries saw moderate improvement in economic trends, especially in external trade data. China and Korea saw healthy gains in exports for the month of October, suggesting further improvement in global demand.
Global equity prices sustained the gains in October on hopes that the U.S. Federal Reserve is likely to delay the tapering of its bond purchases until next year. Helped by gains across most major economies, global manufacturing and services output growth accelerated further in October. The pace of growth in the U.S. slowed from the previous month, but output continued to expand. Factory output growth was the strongest in the U.K. while the emerging economies, except India, also saw improvement.
Global Sector Spotlight for the Month: Telecommunications
Slower demand growth in the mature markets intensifies price competition while the emerging economies are transitioning from voice to data services.
After more than a decade of rapid growth brought about by technological innovation and the opening up of new markets, the outlook for the global telecom sector has moderated. While the leading service providers in major markets remain profitable and continue to see growth in their customer bases, their ability to sustain the growth rates is increasingly being questioned. Demand for data services remain robust, helped by the introduction of new services and more capable devices, but voice growth has slowed. Even in the case of data services, demand growth is likely to moderate in the mature markets as most subscribers have made the switch to smart phones and are already data users. At the same time, companies are under pressure to sustain investments in infrastructure and airwave spectrum to stay ahead.
The U.S. telecom market highlights the growth challenges facing the industry now. A mature market where a series of consolidation moves have resulted in four strong operators, the U.S. is now seeing competitive pricing pressures that could restrict operating margins. One of the smaller companies in the top four has moved away from the conventional pricing model and is now seeing faster customer additions than its competitors. If this trend continues, the market leaders may have to respond by making changes to their current pricing models or by introducing new models that would attract cost-conscious customers.
In Europe, the sector has been facing a rough patch as the recession has limited consumer spending on products and services. With the economy showing signs of a revival, the industry is also expected to see better growth with increased demand for data services. The industry is more fragmented in Europe, and is hence more likely to see further consolidation in the future. Large, cash-rich telecom operators from other parts of the world would likely see Europe as an opportunity to diversify their operations at relatively lower costs.
The pace of subscriber additions has slowed significantly in the emerging countries, especially China and India, which together have more telecom users than all the developed countries combined. Demand for basic voice services is now well served in most of these countries, even in rural areas. At the same time, demand for high speed data and other services is gradually picking up and offer long-term growth opportunities for the major operators. Nevertheless, telecom companies will likely need to make larger investments in network infrastructure and spectrum acquisition if they are to successfully tap into future growth in data demand.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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