The pace of technological change is accelerating due to the rapid growth in specialised semiconductor chips. Chip designers are circumventing many of the physical challenges that pointed to the end of Moore’s Law. This has ramifications for economic growth and productivity, globally. Faster chips were instrumental to the investment in information technology (IT) that drove the dotcom boom (1996 – 2000). The current IT cycle may last longer and provide a bigger boost to growth. It will also affect more countries. Many emerging market economies are benefitting from today’s new technologies.
It may also mean that core inflation will remain below target in the developed world despite further declines in unemployment rates. More sophisticated, idiosyncratic semiconductor chips underpin many of the innovations that are disrupting old business models. The NAIRU may be much lower in the US than the Federal Reserve estimates (4.7%), and far below the current jobless rate in Japan of 2.8%. There is no sign of wage reflation in the UK, even though the unemployment rate has dropped to 4.7%.
Samsung’s profits for Q1 2017 were driven by a strong recovery in semiconductors. South Korea’s exports have risen sharply on the back of higher chip production (see chart on page 2). China is investing heavily to expand its domestic capability in semiconductors. Leading chip manufacturers including Intel, Nvidia, Qualcomm and TSMC have all stepped up their investment in more powerful, specialist chips. These positive developments are, however, unlikely to be recorded properly in the GDP statistics. Inflation will continue to be overstated: real growth will remain under-recorded. The dispersion in performance between old and new sectors will widen.
Summary
- More powerful semiconductor chips point to deeper IT deflation, and lower NAIRUs
- Idiosyncratic chips powering emerging technologies
- However, hedonics becoming more difficult
