We are just at the start of the earnings releases on Q3 2012 vendor revenues and a week and a half from the first release of US GDP data on business technology investment in the quarter, but it is already clear that Q3 2012 will be a weak one in terms of tech market growth. IBM reported a 5% revenue decline its third quarter; Microsoft had an 8% decline in total revenues, and we estimate a 5% decline in its sales to business; and Tibco had a 3% drop in its revenues for its quarter ending August 31, 2012. Oracle's software revenues for its quarter for the same period rose by 2% (with license revenues down 1%); and Accenture saw its revenues for the same period rise by just 2%. While there have been some positives — Tata Consultancy Systems' revenues were up by 13%, and Adobe had a 7% increase in its revenues — weakness has been the dominant story so far.
Is this the start of a downward trend in the tech market? I don't think so. Yes, there continues to be weakness in Europe, with most countries there in or close to recession. But the US economy seems to be gathering strength, with consumer confidence on the rise, retail sales increasing, and the housing sector improving. China, which had been showing signs of slowing growth, also appears to be picking up. So, the economic fundamentals are pointing toward an improving tech sector in Q4 2012 and 2013.
Last Friday, we hosted our first roundtable in Singapore focusing on the IT services industry in Asia. The goal of these quarterly events is to create a community of services leaders who can network and exchange ideas on the growth opportunities and challenges in the region.
Senior leaders from 14 large services vendors gathered this morning to discuss how a perfect storm of technologies (including cloud, social, big data, and mobility) is transforming the way clients engage with service providers in Asia. Forrester analysts John McCarthy, Frederic Giron, and Dane Anderson brainstormed with business leaders from services vendors including Atos, BT, HCL, HP, and IBM around the four factors that are reshaping the IT services industry (see Figure 1):
The restructuring of the Asian economy. The economic uncertainty has now spread to emerging markets, and economic growth is expected to slow down significantly in India and China this year. Forrester has revised its IT services spending forecasts downward by two to four percentage points in these countries for 2012 and 2013. Participants corroborated this downgrade and mentioned they were seeing the process of making decisions on large transformation projects getting longer, especially in the manufacturing industry.
Picking through economic news this week (French and German growth numbers; financial market turmoil; scattered US indicators) and the vendor announcements from Dell, HP, Lenovo, NetApp, and Salesforce.com, four trends emerge:
European economies are headed for a recession, and European tech market is already in decline. Eurostat (The European Union statistical agency) announced on Tuesday, August 16, that real GDP in the 17 euro area countries and the 27 European countries both grew by just 0.2% in the second quarter of 2011 from the first quarter. Annualizing these growth rates to make them comparable with US GDP growth rates, the numbers were 0.8%. France's real GDP showed no growth, while Germany's real growth was o.4% on an annualized basis. These were sharp slowdowns from France's growth of 3.6% in Q1 and Germany's growth of 5.3%. With worries growing about a financial crisis hitting European banks as a result of potential losses on their holdings of Greek, Portuguese, Irish, Italian, and Spanish bonds, ongoing government austerity programs in these countries as well as the UK, and feeble EU efforts to deal with the problems, there is a high probability that Europe will slip into recession in Q3 and Q4 2011.
As a geographic unit, the market for business and government purchases of information and communications technologies (ICT) in Western and Central Europe will grow by 3.8% in 2011 (measured in euros), compared with 6.4% growth in the US (measured in US dollars). Excluding slow-growing telecommunications services, the information technology (IT) market in Western and Central Europe will grow by 4.5% in euros vs. the 7.4% growth in US dollars in the US (see June 7, “European Information And Communications Technology Market 2011 To 2012 -- The North-South Divide Persists, With Wide Variations In Country Information And Communications Technology Growth”).
At first glance, our forecast that the global IT market will expand by 7.1% in 2011 is right in line with the 7.2% growth we are estimating occurred in 2010 (see our January 11, 2011, "2010-2012 Global Tech Industry Outlook" report). In fact, there are many points of similarity between the two years besides the overall growth rates, such as comparable growth rates in communications equipment purchases both years, or the US and Asia Pacific growing at similar rates of growth in 2010 and 2011.
However, there are three important points of difference that I think make our projected growth for 2011 more impressive than the almost identical rate of growth that occurred last year:
Minimal rebound effects in 2011. 2010 was the year when IT capital investment bounced back from recession-depressed levels in 2009, especially in computer equipment and to a lesser degree in software. Companies had been cutting back on purchases of servers, personal computers, storage devices, and peripherals like printers and monitors since 2007. That meant a build-up of a lot of deferred demand for replacement equipment, which was unleashed in 2010, helping to drive 11% growth in this category last year. Licensed software also felt some of these effects, with freezes on capital investment pushing purchases from 2009 into 2010. Thus, in both cases, 2010 growth rates were measured off of low bases in 2009. In contrast, the 2011 growth will reflect new demand for IT goods and services, not pent-up demand for prior years. And the 2011 growth rates will be measured off a stronger base that reflects that fact.
While the last results for US Senate and House of Representative seats are still trickling in, the overall picture is clear — the Republicans have taken control of the House, but the Democrats will retain their majority in the Senate and of course still hold the presidency. In my view, this outcome is a small positive for the tech market, but doesn’t fundamentally change our outlook for around 8% growth in the US IT market and 7% growth in global IT markets in 2010 and 2011.
On the eve of the election, my big concern from an IT market perspective was that the Republicans would take control of both the House and the Senate. That concern was not driven by my political affiliation (which happens to favor the Democrats), but by the potential for a political stalemate between a confrontational Republican Congress (with hard-line conservative Republicans and Tea Party supporters setting a shut-down-the-government tone) and a combative Democratic president. In that political environment, badly needed measures to help stimulate a lagging economy would get stalled, the political battles could shake already weak business and consumer confidence, and the US economy could then slip into a renewed recession. And an economic downturn of course would be bad for the tech sector.
While taking in the latest US GDP report and its implications for the tech markets, I have been struck by a pattern of US business putting its money into technology instead of people. Part of the increased tech investment is replacement of old servers and PCs, but most investment has been in technologies to cut costs and improve efficiency. These purchases have been good news for the US tech market, which (as I predicted) is growing strongly. However, it is not so good for the overall economy. The lift to US economic growth from business IT investment is a positive, but the corporate reluctance to hire new employees is making consumers reluctant to spend. Moreover, much of the business investment in computer equipment is flowing overseas in the form of imports of these products, which is also hurting US GDP growth. So, the strong outlook for the tech market is paradoxically contributing to a less robust outlook for the US economy.
The US Department of Commerce released its preliminary report on US Gross Domestic Product in Q2 2010 last Friday, July 31, 2010, and today posted more detailed numbers on business investment in computer equipment and communications equipment. In addition to providing Q2 2010 data, there also were revisions in data for business investment in computer equipment, communications equipment, and software for 2007 to Q1 2010. So, let’s look at what the latest data is saying about the state of the US tech market.
Expectations about economic growth prospects and the resulting implications for tech markets have been gyrating wildly in 2010. First, there were fears that the Greek debt crisis would spread to Portugal, Spain, Italy, maybe even the UK, leading to a breakup of the euro zone and a renewed recession in Europe. Then, as worries about Europe started to ebb after Greece and other countries successfully held debt tenders, the slow pace of job growth and weak retail sales in the US sparked concerns that the US was facing a double-dip recession.
What should a tech market watcher make of this uncertainty? As I read the economic and tech market indicators, I see more news that is in line with our expectations than not; where there have been surprises, they have been more often positive than negative. Economic recoveries seldom move in a straight line, so I did not expect to see an unbroken string of good news. Moreover, because of the imbalances that caused this downturn (too much consumer spending in the US, housing bubbles in the US and several other countries, too much debt), I expected the US economic recovery in particular to be relatively weak, with real growth rates of 2% to 3%. True, European economic growth — in large part due to the effects of the Greek debt crisis — has been weaker than expected, and the euro dropped much more against the US dollar then I had assumed. On the other hand, economic growth in Asia Pacific and Latin America has been stronger than I expected, and many of the currencies in these regions have risen in value against the dollar. Lastly, the indicators of the tech market itself — both US and other government data on business investment in technology (where available), as well as the vendor data from earnings releases for calendar Q1 2010 — has generally been stronger than our forecasts.
Tech is back! Just as our in-house economist Andy Bartels predicted, the first quarter numbers from the big tech vendors confirm that IT investment is on a growth trajectory again. Check out the recent Q1 numbers from Intel and IBM, for example.
And these results represent more than just a rebound from the nasty 2008-09 recession. We forecast that the IT industry is entering a multi-year period of innovation and growth, when spending growth on technology goods and services will be a substantial multiple of overall GDP growth in the US and around the world. Check out Andy’s latest forecasts here.
For more on the opportunities and challenges that the next wave of tech industry growth will present to vendor strategists, join us in Las Vegas later this month at Forrester’s flagship event, the IT Forum. We will be presenting our latest research on Smart Computing, the Personal Cloud, and the approaches that vendor strategists must take to stay in front of “the next big thing.” Hope to see you there!