Lower energy prices continued to brighten the global economic growth outlook, though some of the recent data trends have been less cheerful. Crude oil prices have slipped to their lowest level since 2010, and the steep fall has the potential to significantly alter global growth patterns next year. The price decline, if sustained, would result in a substantial shift in consumption power from the energy exporting countries to the importers. Cheap pump prices are already making U.S. consumers more confident, and could make the U.S. economy grow even faster next year. The pace of economic growth in other major energy importers such as the Euro-zone, China, Japan, South Korea and India are also likely to see upgrades. As inflation risks have nearly disappeared, governments in some of these countries are now in a better position to increase public spending while central banks have more flexibility to cut interest rates.
The U.S. economy expanded at a faster pace during the third quarter than initially estimated, and is likely to drive global growth in the near term. Data from the Euro-zone remained subdued, though there are signs of improvement in exports as the weaker euro has made the region more competitive in overseas markets. The European Central Bank did not announce any major policy decisions after its November meeting, but indicated that it is preparing a large quantitative stimulus program for early next year. In Japan, the third quarter decline in output was worse than estimated earlier. The Japanese government, which remained in power after recent year-end elections, has postponed further consumption tax increases. Global manufacturing output continued to expand during the month, though at a slower pace when compared to the previous month.
GLOBAL INDUSTRY SPOTLIGHT FOR THE MONTH: TELECOM
Increasing sales of smartphones and tablet computers are likely to drive demand for data services in the future, and lift revenue growth for telecom service providers. As more content becomes available, customers are likely to upgrade to faster and higher quality data services. This shift in consumer preference should be more pronounced in emerging countries where most customers still use basic phones. However, to deliver better quality and faster speeds, service providers may have to aggressively acquire additional spectrum. The limited availability of spectrum in most major countries could lead to bidding wars and push up costs for the service providers.
Helped by improved technology and lower prices, smartphone sales volumes have set a scorching pace in recent years. Aggregate worldwide sales of smartphones are likely to be around 1.4 billion units this year, an increase of over 25 percent compared to 2013, according to International Data Corporation. Sales growth is likely to moderate in coming years, but aggregate volumes are expected to reach 1.9 billion units in another four years. In other words, more than 25 percent of the world population would be smartphone users by then. This offers a significant opportunity, and also some challenges, to the world’s telecom service providers.
The potential for growing revenues from data services is obvious. While voice is still an important revenue earner for telecom companies, it has been a declining segment recently. In developed markets such as the U.S., more than half of the total revenues of telecom carriers now come from data services. Monthly service plans now focus more on data, as the types of devices that can connect to wireless networks have proliferated. Better screen resolutions and faster processing speeds have made gaming and video content more accessible on mobile devices. This trend has not likely peaked yet, as the number of users who frequently access video and games on mobile devices is still relatively low.
Demand for data services is expected to grow at a faster rate in the developing countries, where the shift to smartphones from basic phones has only started. In countries with large populations such as India and Indonesia, smartphone users still represent less than 20 percent of the population, according to Google. Most handset manufacturers have targeted these price sensitive markets with low cost devices that are now driving volume growth.
The leading carriers in most major markets across the world have already made investments and now have 3G or 4G capable networks. In the U.S., one of the largest carriers has forecast a decline in capital investments for network upgrades in the coming few years. This should help improve profitability of carriers in markets where consolidation has already happened and price competition is not very intense. In regions where the market is still fragmented among several carriers, the need to improve returns could encourage more mergers and acquisitions in the sector.
However, the growing data usage may force carriers to acquire more telecom spectrum, which is already a scarce resource. The quality of data services depends on the amount of spectrum available to carriers, especially in the lower frequency bands. Availability of new spectrum is very limited and recent auctions, such as the ongoing AWS-3 auction by the U.S. FCC, have seen aggressive bidding. Carriers with strong balance sheets are also likely to look at acquisitions to increase their spectrum availability. This would potentially increase their costs and limit margin expansion, even when revenue growth is fairly robust.
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FORWARD LOOKING STATEMENTS
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