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Posted by Andrew Bartels on October 27, 2011
Tech vendors got two pieces of good news today.
First, European leaders appear to have reached agreement on a three-phase initiative that will 1) reduce the debt burden on Greece by about half, reducing its debt-to-GDP level to a potentially affordable level of 120%; 2) push European banks to increase their capital by about $150 billion so they can better withstand writedowns on their portfolio of Greek, Portuguese, Irish, and potentially other government debt; and 3) increase the funding for the European Financial Stability Facility to about €1 trillion (US$1.4 trillion) in order to extend credit if needed to Italy and Spain in addition to Greece, Italy, and Portugal. Taken together, these initiatives if followed through will go a long way to defusing the debt problem that has hung over European economies. It is premature to say the European debt crisis is over -- European leaders have consistently been several months late and several hundred million euros short of the aggressive rescue efforts that the US took to deal with the Lehman Brothers financial crisis. Still, this is the first time that European leaders have come up with a plan that matches the scope of the problem they face. While weak economic growth and continued downturns in most heavily indebted European countries will still persist, we think the risk of a serious recession in Europe may have been averted.
Second, the risk of a parallel recession in the US economy also has receded, based on the third quarter US GDP report that came out this morning. The headline number was a 2.5% annualized increase in US real GDP in Q3 2011 from Q2 2011 -- a distinct improvement from the 1.3% growth rate in Q2 and 0.4% growth in Q1 2011. By normal economic recovery standards, this was still a feeble growth rate and one that will not do much to reduce the unemployment rate. But along with recent increases in employment and consumer spending, the third quarter US GDP report shows that the US economy is still growing and will probably continue to do so through at least the end of 2011.
The US GDP report also had some positive news on business investment in technology. Business purchases of computer equipment rose by 11% in the quarter and business investment in software increased by 6.3% -- a number that probably understates actual software purchases because it does appear to include software-as-a-service (SaaS) spending. "Other" IT investment (principally, communications equipment, but also medical equipment, instruments, and copiers) was down by 3%, but we will need to wait until the Department of Commerce releases the details on "other" tomorrow morning to see how much of this decline was in communications equipment.
This data echoes the moderate growth that we are seeing in the Q3 2011 US revenues of the 45 leading tech vendors that we track, which is more or less in line with these patterns. A number of major vendors -- especially, Cisco, Dell, HP, and Lenovo -- have not reported yet, so we are using investment analyst projections for these vendors for their revenues in Q3. Still, it looks like the vendors' US revenues will show about 5% growth year over year -- about the same as the 4% growth in business investment in IT in the GDP report. However, there are different areas of strength in the vendor data. For example, the combined computer hardware vendor revenues are up just 1% (note, though, that we don't include Apple in our vendors because it has historically sold mostly to consumers) -- much less than the 11% increase in business investment in computer equipment in the GDP report. Meanwhile, the combined software revenues are up 11%, about twice as fast as the 6% growth in business investment in software. Communications equipment vendor revenues from the US are up just 1%, not far from the likely 2%-3% decline in the GDP report.
Our most recent tech market forecast had assumed that both Europe and the US would avoid recessions, experiencing weak but still positive economic growth. We had also expected the kind of growth in business investment in information technology that was reported. And the Q3 data on business IT investment and tech vendors' US revenue are about what we had assumed. So, we don't expect to make any significant changes in the tech market forecast that we published in September (see September 15, 2011, "Global Tech Market Outlook For 2011 And 2012: Economic And Financial Turmoil Dims 2012 Prospects"). We are still expecting global growth in business and government purchases of computer and communications equipment, software, and IT consulting and outsourcing services to be around 7-1/2% in 2011 when measured in local currencies, and around 6% in 2012. What has changed as a result of today's news is the potential for significantly slower growth or actual declines in tech purchases is much lower than it was a month or so ago.
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