Fitch Ratings: Semiconductor slump highlights world trade slowdown


KUALA LUMPUR: The sharp downturn in the global tech cycle has been one of the factors contributing to the decline in manufacturing and world trade growth over the past year or so, Fitch Ratings says. 

It said on Friday the tech cycle, as measured by global semiconductor sales, and the world trade cycle (in current US dollars) have been closely correlated historically. 

The slump in global semiconductor sales in 2019, down more than 13% on-year in the first half of 2019, has been the sharpest since 2009.

Weakness in the tech cycle is not the only contributor to the word trade slowdown. 

In its latest "Global Economic Outlook", the rating agency said cooling demand for both capital goods and cars -- two major goods driving the manufacturing cycle through extensive global supply chain linkages -- has also weighed on world trade growth.

Fitch pointed out the weakness in global semiconductors demand has had large negative spillover effects on countries where a significant part of exports is technology related, such as South Korea. 

“We forecast Korean GDP growth to slip to only 2% in 2019 - its worst performance since 2009 - in part because of plunging semiconductor export receipts (down around 22.5% yoy in 1H19 in US dollar terms), prompting businesses to cut back on capital investment and hiring in the manufacturing sector.

“The global trade and manufacturing slump has been caused in large part by rising trade protectionism, a related rise in uncertainty, and both cyclical and structural softening domestic demand in China,” it said. 

The rating agency said semiconductor sales have been particularly severely hit by the Chinese economy's slowdown, dropping nearly 8% yoy in 1H19. 

It pointed out the slowdown was a blow to chipmakers, as China accounts for around 35% of worldwide semiconductor sales. 

“Falling Chinese demand for tech products has been particularly evident in mobile phone purchases,” it said.

Several other factors have amplified the downturn in the tech sector, such as: correction from overinvestment by tech companies that took advantage of the US tax cuts in 2018, a pause in technological innovation that has lengthened the demand for replacement from customers, and the bursting of the cryptocurrency bubbles, which suppressed demand for chips by "miners". 

Recent data support the view that this cycle may have stabilised, but not rebounded yet.

“Japan's recent decision to impose tighter restrictions on Korea regarding key raw materials for the semiconductor and display industries adds more uncertainty to the global tech market.

“If restrictions remain, Korean chipmakers' production lines and therefore global semiconductor supply chains are likely to be disrupted. Korean chipmakers are major actors in global semiconductor supply chains.

“As a bellwether for global trade, persistently subdued semiconductor sales point to world trade growth remaining muted in the coming months,” it said. 



   

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