Bowed but not beaten - there's life yet in New Economy

Markets are closed to technology funding for now, but the IT revolution is here to stay

Is the New Economy already history? That seems to be the message given by plummeting hi-tech share prices and the mounting number of warnings about a recession in the United States. The symbolic Nasdaq index fell 39 per cent in 2000, its biggest one-year drop since its 1971 launch. It started this year as it ended last, shedding 124 points by midday yesterday.

Is the New Economy already history? That seems to be the message given by plummeting hi-tech share prices and the mounting number of warnings about a recession in the United States. The symbolic Nasdaq index fell 39 per cent in 2000, its biggest one-year drop since its 1971 launch. It started this year as it ended last, shedding 124 points by midday yesterday.

Recent industry figures suggest US dot.com companies axed 41,000 jobs in December, cutbacks on a scale that might point to weak official jobs figures due on Friday. Traders will be braced for another bout of selling if their fears of a fresh sign of economic slowdown are indeed confirmed. European hi-tech markets have certainly not escaped. The UK's FTSE techMARK 100 index was down 32 per cent in 2000 while Germany's Neuer Markt shed two-thirds of its value.

The worldwide share price crashes have made it next to impossible for many hi-tech companies, floated in the sure knowledge they would need to return to investors for extra funds, to find that additional cash. On the final trading day of 1999, LetsBuyIt.com, a Neuer Markt-listed internet retailer, suspended its shares saying it needed to raise about 80m euros, and was rewarded with a fall of up to 69 per cent in its share price at one point after trading resumed yesterday. QXL, the online auctioneer, has seen its shares drop to 8.25p yesterday, from a peak of £8 earlier in the year, despite securing extra funding of £30m. Privately many dot.com entrepreneurs admit they stand no chance of finding the necessary finance unless technology stocks pick up soon.

Telecoms companies around the world might face the same loss of investor appetite after recent warnings that the sector is overburdened with debt, issued in many cases to pay for new generation mobile phone licences. After the flop of the 3.3bn euro (£2.1bn) float of Telefonica Moviles in November other expected offers, such as BT Wireless and Deutsche Telekom's subsidiary T-Mobile were put on ice. France Telecom also plans to float a stake in the recently acquired Orange early in 2001. If such offers prove disappointing they could put the skids under the broader technology, media and telecoms sector once again.

The tech crash on the world's stock markets follows the extraordinary gains seen in the 18 months up to March 2000. For example, the Nasdaq gained 256 per cent between its October 1998 low and its peak of 5,048.62 on 10 March 2000. During that period, which many commentators described throughout as a bubble, investors poured money into internet and dot.com and other TMT stocks. With capital virtually free, there was over-investment, leaving a legacy of over-capacity now.

However, one of the biggest reasons for the change in sentiment about the New Economy has been the emerging evidence of a slowdown in the US economy. The statistics, so far, point to weaker growth rather than outright recession. However, they could be lagging reality. Stephen Lewis, chief economist at Monument Derivatives, said: "Computer sales were weak around the key Thanksgiving and Christmas periods. But news like that will not yet be reflected in the numbers." Yesterday's weaker-than-expected survey of manufacturing, from the National Association of Purchasing Managers, suggested industrial output is already contracting sharply.

Weaker growth will undermine the key piece of evidence that had convinced investors there was a 'new paradigm' justifying the high valuations they had put on many shares: the upsurge in productivity. In the years since 1995 American productivity has grown significantly faster than in the recent past, a phenomenon attributed to the massive investment boom in computers and telecoms.

Yet the belief that the business cycle had been abolished was bound to be proved false at some point. Equally, it was always wrong to assume that the share price bubble gave the full measure of the New Economy. If productivity growth slows less in the coming downturn than it did in earlier ones, the improvement in productivity over the full business cycle will remain intact.

Almost every new technology has triggered an investment mania. Eventually, exaggerated hopes of profit were disappointed because a competitive market economy delivers the benefits of new technologies to consumers, not just shareholders. When the dust cleared in earlier episodes the technology, whether electricity, rail, cars or radio, remained to transform the economy.

Many New Economy sceptics will still be secretly delighted about the dot.com bust. One prominent critic, Professor Robert Gordon of Northwestern University, has argued that e-tailing and mobile phones bear no comparison to the wave of new technologies that delivered the golden era of growth. He lists electricity, the internal combustion engine, petro-chemicals and pharmaceuticals, entertainment and communications technologies, and indoor plumbing. How could any amount of cost saving from business-to-business e-commerce compare with the benefits of these?

Such dismissive verdicts on the New Economy miss out a lot of other important emerging technologies such as genomics, robotics, molecular computing and nanotechnology, however. The potential for growth is not only about online retailing but it is also about more than personal computers and telephones.

From household robots, currently packaged as cute upmarket toy dogs or butlers, to astonishing new genetic therapies, everyday life could well be transformed. Professor Gordon's examples span the years 1844 (the telegraph) to 1911 (television). A similar 60-year period of innovation spanning the turn of the 21st century will have produced an equally revolutionary set of new technologies, all built on the foundations of the astonishing increase in power and decline in price of microprocessors.

The only possible verdict on the New Economy is that is is too soon to tell whether these changes add up to a revolution. There is still every reason to hope that, after ironing out the ups and downs of the economic cycle, long-run growth rates can stay higher than their dismal late-20th century average.