European Tech Market Showing Signs Of Life, But Not Yet A Boom

Forrester has just published its annual European Tech Market Outlook (see "At Last, A Tech Market Recovery In Europe"), and we are projecting modest growth of 2.3% in euros in 2014 for European business and government purchases of technology goods and services, with an acceleration to 4.9% in 2015.  There are some bright spots in the European tech market:

  • Spending on technology that supports customer facing processes (e.g,, customer relationship management, marketing automation, mobile applications, eCommerce solutions, Web content management, etc.) will rise by over 10% as firms put priorities on technologies that help them directly win, serve, and retain more empowered customers;
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A Better Global Tech Market In 2014, With The US Pulling the Freight

Forrester has just published our forecast for the 2014-2015 global tech market (January 2, 2014, “A Better But Still Subpar Global Tech Market In 2014 And 2015”), and we are predicting that business and government purchases of information technologies (IT) will grow by 6.2% in US dollars in 2014, and by 5.5% in exchange-rate-adjusted or local currency terms. (Note that this data includes purchases of computer equipment, communications equipment, software, IT consulting and systems integration services, and IT outsourcing services, but does not include purchases of telecommunications services.) The US dollar growth rate will be distinctly better than the 1.6% growth in US dollars in 2013, though constant currency growth will be only somewhat better than the 4.3% growth in 2013. Still, the global tech market won’t see strong growth until 2015, and even then the 8.1% US dollar and 6.9% local currency growth rates will be well below the double-digit growth rates of the late 1990s and 2000 era.

Three interconnected and reinforcing themes will define the global tech market this year:

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Old ROI Methods Are Holding Back The Adoption Of New Technology

My colleagues at Forrester and I have been puzzling over the discrepancy between the wealth of attractive new mobile, cloud, and smart computing technologies in the market, and the relatively weak record of actual growth in tech spending that our tech market forecasting numbers show.  Certainly, the recessions in Europe and weak economies in the US, Japan, China, India, Brazil and other emerging markets explain part of the weakness in tech buying.  In addition, cloud computing’s impact on the timing of tech spending (reducing initial upfront capital purchases of owned hardware and software while increasing future subscription payments for use of these resources) means that  spending that in the past would have occurred in current years has now been pushed into the future.  Lastly, as a recent Economist article pointed out, business investment in general has been low compared to GDP and to cash distributed to shareholders this decade, as CEOs with stock option compensation have focused on meeting quarterly earnings-per-share targets instead of investing for the longer term (see Buttonwood, “The Profits Prophet,” The Economist, October 5, 2013). Still, even taking these factors into account, tech investment has been growing more slowly relative to economic activity than in past cycles of tech innovation and growth.

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The Canadian Tech Market Continues To Underperform In 2013, But Will Pick Up The Pace In 2014

Relative to both Canada's economic growth and the US tech market, Canadian business and government purchases of information and communication technologies (ICT) has lagged since 2011. Spooked by European debt problems, uncertain growth prospects in its US and Asian export markets, and the strong Canadian dollar, business executives have been holding back on making tech investments.  That pattern has continued in 2013, with our latest Canadian tech market report projecting growth of just 2.2% in Canadian ICT purchases in 2013 when measured in Canadian dollars (see October 25, 2013, “The Canadian Tech Market 2013 To 2014 – Sluggish Canadian Tech Market Will Accelerate In 2014”).  Business and government purchases of computer equipment will be down 0.2% in 2013, purchases of communications equipment will rise by just 0.9%, and spending on IT outsourcing and telecommunications services will increase by 2.6% and 0.7%, respectively.  The best tech sectors in a generally weak Canadian tech market will be software (with 5.8% growth) and IT consulting and systems integration services (with 3.6% growth).  

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US Tech Spending Growth Slows To Under 4% in 2013 Due Federal Budget Cuts And Shutdowns

The Congressional juveniles with their calls for big Federal budgets cuts, tolerance of Federal government shutdowns and flirting with Federal debt defaults have been put back into their corner, so it is time to assess how much damage they have done to the US tech market.  In Forrester’s semi-annual US tech market update, we conclude that the Federal budget sequestration, the two-week Federal government shutdown, and the fallout from threats to not raise the Federal debt ceiling have shaved about two percentage points of growth from business and government spending on technology goods and services in 2013 (October 25, 2013, “Government Spending Brinksmanship Drags Down The 2013 US Tech Market Outlook – We Cut Our 2013 Spending Growth Estimate To 3.9% From 5.7%”).

Not surprisingly, government tech spending has borne the brunt of the slowdown, with Federal government buying down while state and local government tech purchases rose modestly.  But since the effects of reduced Federal spending have flowed into the private sector, purchases of computer equipment have also slumped, as cautious CIOs dial back their spending on these easily deferred categories of the tech budget.  Servers and PCs have been especially hard hit as alternatives like infrastructure-as-a-service (instead of buying servers) and tablets (as replacements for laptops) accentuated CIO caution.  However, there is evidence that even corporate purchases of tablets have slowed in 2013 as the initial rush to put these new devices into the hands of employees has been way to a more measured adoption curve.

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What Would Happen To Tech Buyers And Tech Sellers If The Federal Government Does In Fact Default

Two weeks after the Federal government shutdown and two days before the Federal government runs out of means to pay all its bills without additional Federal borrowing, the unthinkable development of a Federal debt default needs to be thought about.  The responsibility for this situation lies squarely with the House Republicans, who have refused to bring to a vote a resolution to raise the debt ceiling without conditions.  Moderate Senate Republicans and Senate Democrats have been working on a resolution that would raise the debt ceiling until January and re-open the Federal government at current, sequestration-reduced spending levels, in return for initiating negotiations between the White House, Democrats, and Republicans on longer-term deficit reduction plan  and some minor adjustments to the Affordable Care Act.  While this could well form the basis for a way out of this deadlock before midnight on Thursday, October 17, some House Republicans have already labeled it "a surrender" and vowed to oppose it.  So, I think the risk of a Federal debt default is at 10% and rising.

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US Government Shutdown Is Mildly Bad For US Tech Market, But US Debt Default Would Be Far Worse

Here we are a week into the Federal government shutdown and, as the Republicans and Fox News commentators like to say, the sky has not fallen.  Nonetheless, in subtle ways, the shutdown is taking a toll on the economy.  To pick one relatively small example, tech market analysts like myself who depend on data from the US Bureau of Economic Analysis, US Census Bureau, and the US Bureau of Labor Statistics are operating in the dark -- just take a look at their Websites, e.g., "Due to the lapse in government funding, www.bea.gov will be unavailable until further notice." More substantively, approximately 800,000 Federal employees are not being paid, Federal government purchases of goods and services have come to a standstill, Federal grants to states and local governments are on hold, and Federal government services ranging from disaster recovery, meat and drug inspections, medical research, public health, to National Parks are not available to citizens and businesses.  

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US Tech Market Getting Stronger: US Q2 2013 GDP Report And Data Revisions Show Weak But Improving US Economy, And Better Tech

The US Bureau of Economic Analysis released its preliminary report on second quarter 2013 US GDP, along with both major revisions to US economic data over the past 50 years, and minor revisions to the data on US business investment in information technology goods and services.  Here are my key takeaways from the report, and its implications for the US tech market.

  • US real GDP growth in Q2 2013 came in better than expected.  The 1.7% growth at an annual rate from Q1 2013 was in line with our projection of 1.9%, but better than what many economists had been forecasting.  Growth rates in Q4 2012 and Q1 2013 were revised down to 0.1% and 1.1%, respectively, from the earlier 0.4% and 2.5%.  These revisions indicate that the end of the payroll tax reductions, the higher tax rates for high-income people, and the Federal budget cuts from sequester did take a toll on economic growth, with government consumption declining in Q4 2012, Q1 2013, and Q2 2013, and business investment in factories and offices falling in Q1 2013.  But consumer spending has been solid, with growth of 1.8% in Q2 2013, 2.3% in Q1 2013, and 1.7% in Q2 2013.  Business investment in equipment, which softened to just 1.6% growth in Q1 2013, improved to 6.8% growth in Q2 2013.  And housing continues to be a growth engine for the US economy, with double digit growth rates in residential investment in the past four quarters, and improving home prices boosting consumer confidence and spending.
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Mixed Is The Word For the Global And European Tech Markets In Mid 2013

At the half mark through 2013, both the global and the European tech markets have pockets of strength and other pockets of weakness, both by product and by geography.  Forrester's mid-2013 global tech market update (July 12, 2013, “A Mixed Outlook For The Global Tech Market In 2013 And 2014 –The US Market And Software Buying Will Be The Drivers Of 2.3% Growth This Year And 5.4% Growth Next Year”) shows the US market for business and government purchases of information technology goods and services doing relatively well, along with tech markets in Latin America and Eastern Europe/Middle East/Africa and parts of Asia Pacific.  However, the tech market in Western and Central Europe will post negative growth and those in Japan, Canada, Australia, and India will grow at a moderate pace.  Measured in US dollars, growth will be subdued at 2.3% in 2013, thanks to the strong dollar, and revenues of US tech vendors will suffer as a result.  However, in local currency terms, growth will more respectable, at 4.6%. Software -- especially for analytical and collaborative applications and for software-as-a-service products -- continue to be a bright spot, with 3.3% dollar growth and 5.7% in local currency-terms. Apart from enterprise purchases of tablets, hardware -- both computer equipment and communications equipment -- will be weak. IT services will be mixed, with slightly stronger demand for IT consulting and systems integration services than for IT outsourcing and hardware maintenance.  

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US Tech Market Will Grow By 6.2% In 2013 And 6.8% In 2014, As Improving Consumer Spending And Housing Offset Government Cutbacks

No one would claim that the US tech market is booming.  With Europe still mired in recession and debt problems, US economic growth looking soft, and business and consumer worries about the US government raising tax rates and cutting Federal spending, it is not surprising that businesses and governments are being cautious in their purchases of technology goods and services.  But we think the fear is overblown.  Forrester's forecast for the US tech market in 2013 and 2014 -- published today as "US Tech Market Outlook For 2013 And 2014: Better Times Ahead" -- projects a 6.2% rise in 2013 and a 6.8% growth in 2014 in US business and government purchases of computer equipment, communications equipment, software, IT consulting and systems integration services, and IT outsourcing.  Adding in slow growing telecommunications services pulls growth down to 5.7% in 2013 and 6.1% in 2014. That may not be a boom, but it is certainly not a bust.

While CIOs are cautious in their tech buying -- and in the case of the Federal government, actually cutting back -- that caution has and will show up mostly in reduced spending on computer and communications equipment (with the exception of tablets).  CIOs will be most aggressive in software, especially for SaaS apps, analytics, and mobile apps. IT outsourcing will see good growth in 2013 as the result of 2012 selection decisions, while IT consulting and systems integration will come on strong in 2014.  Business and government purchases of telecommunications services will continue to grow at a slower rate than the overall tech market.  

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