By Martin Grueber, Research Leader, Battelle, Cleveland, Ohio and Tim Studt, Editor in Chief, Advantage Business Media
Tuesday, December 22, 2009
Sustained R&D investment is key to economic growth. Those are strong words that are easy to follow in good economic times, but more difficult to follow in bad economic times. The global recession that officially began in the U.S. in late-2007, and is expected to ‘officially’ end (for the U.S.) in late-2009, has been described as the worst economic recession since the Great Depression. As of November 2009, this recession is already the longest (23 months) of the 11 recessions experienced by the U.S. since World War II. The U.S. gross domestic product contracted about 2.5% from 4Q 2008 to 3Q 2009.
Following a decade-long expansion and based mostly on established budgets and optimistic outlooks, U. S. industries continued growing their R&D budgets in 2008, expanding by nearly 8.5%, or more than $20 billion, from what they spent in 2007. Despite their good intentions, when the downturn turned from mild to severe, industrial firms were forced to cut their R&D budgets. Total U.S. industrial R&D dropped by 3.77%, or nearly $10 billion overall, in 2009 from what was spent in 2008.
A consensus of economists expects the U.S. economy to grow 3.3% in 2010 and 2.5% in 2011. The Battelle/
R&D Magazine forecast expects U.S. industry to resume its R&D growth in 2010 by expanding 2.85% from the reduced level in 2009—or just over 1% more than was spent in 2008.
This correlation of economic growth to R&D spending was seen following the recession and dot-com bust of 2001-02, when industrial R&D fell by 4.1%, or nearly $8 billion. The overall GDP also declined from a fairly stable 4%+ rate in the late 1990s to just 1.1% in 2001, and rose in 2002 to 2004. At that time, federal support of R&D grew by nearly 7% to offset the industrial decline, while in 2009 federal support grew by 5.7%. Thus, the severity of the 2001-02 slowdown was not as severe as the current recession.
Of course, there was the American Recovery and Reinvestment Act (ARRA) in 2009, which added monies to both the GDP and the overall R&D investments. However, of the $18.1 billion that was dedicated to R&D investments in the ARRA stimulus, less than 20% will actually be spent in 2009, with the remaining funds spent in 2010 and 2011.
click to enlarge
|
|
Applications for growth
Both GDP and R&D growth are expected to remain positive in 2010, despite speculation as to the possibility of a ‘double-dip’ recession in 2010. Drivers for a double-dip recession remain under control, including energy costs and inventories. Government officials are also already talking about a second stimulus bill should indicators point toward a double-dip event.
This GDP revival is fueled by slowly increasing consumer demand, increasing production to refill depleted inventories, a stabilization of energy costs, and slow improvements in the financial markets. None of these factors are particularly strong, but cautious optimism continues to prevail. This may explain the relatively slow recovery rates, as R&D managers weigh all of their options. Consumer spending is likely the weakest of these factors and is likely to be supplanted over the next several years by debt repayment and a focus on rebuilding savings. Continued high unemployment levels in the U.S. are going to restrict consumer spending in the near-term, as well over the next three to four years.
From an R&D standpoint, there are numerous drivers for strong R&D growth that overlap a number of technologies, materials, and processes. These include alternative energy technologies, biotech, infrastructure enhancements, transportation, accelerating ICT (information and communications technologies), medical devices and procedures, sustainability, agriculture, and climate change implications.
Another driver for continued U.S. R&D and GDP growth is the competitive pressures that have resulted from increasing globalization effects. While Europe and the Americas suffered with decreasing GDP and R&D levels over the past two years, Asian economies continued to grow (albeit slightly slower) their economies and R&D investments. Just over the past year, the U.S. lost nearly a 1% share of the global R&D market, and Europe lost more than 1.5%, while Asia gained more than 1.5%.
click to enlarge
|
|
Fiscal security
Overall GDP growth and its resultant effects on industrial R&D spending will be influenced by various factors over the next several years, including inflation, trade deficits, government deficits, and exchange rates. The inflation rate is expected to remain low over the next two years, as it will be restricted from increasing through the continuing excess capacities in a wide range of industries. The U.S. dollar is also expected to see continued weakening, fueled by continuing large government deficits and diversification by investors from U.S. assets into other vehicles. Investors are also concerned by a potential widening of the U.S. trade deficit, as increased global production pushes energy costs higher.
The U.S. fiscal deficit, as a percent of GDP, is expected to drop from its current (2009) 10% of GDP to about 7% of GDP by 2011. This rate continues to be higher than Germany, China, and Canada, but lower than that of the UK.
Lower state revenues also will limit state government as a source of R&D funds. In particular, academic basic and applied research funding is likely to be limited over the next several years, as states work to maintain essential R&D programs and cut others. State funding cuts for academia have already been noted for some states, which have seen drops in their operating revenues.