No deflation threat from service outsourcing wave

Jonathan Anderson, chief Asia-Pacific economist of investment bank UBS based in Hong Kong, said shifting services offshore was merely the latest phase in a perpetual process of outsourcing of labour-intensive jobs that industrial countries had coped with for more than 40 years. ‘‘The impact of this over the next few years is likely to be still very small,’’ Anderson said. ‘‘It’s a tiny part of any macro economy. Let’s not get over-excited.’’

Of course, for individuals who are directly affected, the quickening pace of globalisation can be traumatic. Britain’s biggest insurer, Aviva Plc, said on Tuesday it would move 2,350 call-centre, IT and office jobs to India, where graduates will do the same work for a fraction of the cost. Other banks and financial service firms, including Reuters Group Plc, are also heading east. US firms had already moved 400,000 business-processing jobs offshore, a total likely to swell to 3.3 million by 2015, by July of this year, according to Forrester. The exodus is already producing a political backlash, with some US States considering laws that would restrict their governments from doing business with firms that move jobs abroad.

But a recent study by McKinsey Global Institute said it was a mistake to think money spent to buy services abroad was lost to the US economy. Firms save 58 cents, mainly in wages, of every dollar of spending on business services that moves offshore, but that money gets ploughed back into new, higher-value-added jobs.

But Bruce Kasman of JP Morgan Chase in New York said the impact of what he called ‘low-simmering’ structural forces such as globalisation paled beside that of two other factors that were coming together to reverse a two-decade trend of disinflation.

First, global policy makers had embarked on a dramatic shift toward expansionary monetary and fiscal policies after a brush with deflation during the last recession filled them with fear. ‘‘Policy makers are more committed towards reflation after having spent the last 15 to 20 years committed towards disinflation and achieving price stability,’’ Kasman said.

Second, the collapse in Asian demand that followed the region’s 1997 currency crisis — and magnified downward pressure on global prices — is fading, Kasman argued.

The results of this dual sea change are already showing up in rising material and producer prices around the globe, a trend Kasman expects to be transmitted through the production chain as markets realise that the world is not awash in excess capacity after all. ‘‘The perception that there’s an unlimited supply of resources that can produce anything almost costlessly in China and India is mistaken,’’ Kasman said.

Indeed, limits to the expansion of back-office jobs offshore may already be appearing. Arvind Panagariya, economics professor at the University of Maryland, said India’s education system was not equipped to train enough people for all the jobs said to be heading its way. The effect on prices would be accordingly limited. ‘‘My gut feeling is that services are going to have much less of an impact on the level of prices than manufacturing has had,’’ he said. (Reuters)