From pandemic to recession: Odds of a tech market decline in 2020 just went up to 50%
Based on recent events related to the novel coronavirus pandemic, we are revising our tech market forecast for 2020 downward. In the best case, we are now looking at US and global tech market growth slowing to around 2% in 2020. That assumes that the US and other major economies have economic declines in the first half of 2020 but recover in the second half. But we think there's a 50% probability that US and global tech markets will decline by 2% or more in 2020, if a full-fledged recession hit.
In either scenario, computer equipment or communications equipment spending will be weakest, with potential declines of 5% to 10%. Tech consulting and systems integration services spending will be flat in a temporary slowdown and could be down by up to 5% if firms really cut back on new tech projects. Software spending growth will slow to the 2% to 4% range in the best case and will post no growth in the worst case of if a recession. Tech outsourcing and telecom services will hold up better, though contract revisions could cause spending to go down as well.
The only positive notes would be continued growth in demand for cloud infrastructure services and potential increases in spending on specialized software, communications equipment and telecom services spending for remote work and remote schooling as firms encourage workers to work from home and schools adopt online courses.
Behind this downward revision in our tech market outlook is a sharp deterioration in the economic outlook. March 11, 2020 saw two announcements that significantly increased the risks of an economic recession both in the US and globally:
- The World Health Organization declared COVID-19 to be a pandemic. This announcement underlined the gravity of the disease, and its broad impacts on sickness and death.
- President Trump's television address confirmed that COVID-19 is a major problem, but also showed the President has no real idea of what to do about it. The ban on European travelers coming to the US was poorly communicated; will be ineffective since COVID-19 is already well-established in the US; antagonized European leaders and worsened the prospects for a coordinated international attack on COVID-19; and needlessly disrupted an air travel industry already in decline. His proposal for suspending payroll taxes attracted limited support in Congress and failed to address the financial distress faced by laid-off workers and temporary workers who wouldn't pay these taxes anyway.
In the absence of effective leadership from the President, businesses, organizations, and people acted in ways that are helpful but inefficient in containing the spread of the disease, and as a result are economically devastating:
- The NBA, NHL, NCAA and other sports cancelled or suspended games.
- Cultural events like SXSW and business conferences were cancelled.
- Many US universities and school districts closed and sent students home for at least several weeks.
- Many businesses encouraged employees to work from home.
- Consumers rushed to stock up on Purell, toilet paper, and food staples in anticipation of self-quarantines.
- And US stock markets suffered their largest one-day drop in prices since 2017.
See also: Coronavirus tech conference cancellations list
All these actions will take a toll on the US economy. Even before this week, consumers, who generate two-thirds of US economic activity, had been pulling back on travel and entertainment, as were many businesses. Distressed businesses in these and related industries were starting to lay workers off. This week's development will probably cause consumers to curtail spending on most items at least for the next few weeks and build reserves for health care spending if needed. Businesses, already hunkered down in response to the US/China trade war, will postpone major investments considering the steep declines in their stock prices and the prospect of consumer cutbacks. Travel, tourism, and entertainment businesses are looking at revenue declines of 30%, 50%, or more. Oil and gas companies have seen crude oil prices drop below $35 a barrel, which will push some into bankruptcy. All this points to at least one quarter of economic decline in the US.
The question is what happens beyond Q1 and Q2 of 2020. The Federal Reserve has already lowered interest rates. Congress has passed and the President signed a $8.3 billion spending package to help fight the spread of COVID-19. The Democratic House, the Republican Senate, and the President are likely to agree on economic stimulus package. Lower oil prices are a boon to consumers. These initiatives will do little to counter fear-driven contractions in consumer spending if COVID-19 infects hundreds of thousands of Americans and leads to quarantines and self-quarantines of millions of people.
But properly designed measures to cushion the financial burden on those directly impacted will limit the down-pull on consumer spending, and broader stimulus can help speed a recovery. We don't know yet how these negatives and positives will play out. But we think the odds have risen to a 50% probability of a US recession with at least two quarters of declining real GDP in 2020.
A similar story is playing out in the rest of the world. While China seems to be on the road to economic recovery, the economies of Japan and South Korea are reeling. In Europe, the near total shutdown of Italy and rising incidents of infection and deaths in France, Germany, the UK, and elsewhere will have similar adverse effects on European economies to what the US is experiencing. The US ban on European visitors is a psychological blow for European leaders looking for US support and leadership. So, the risks of recessions in Europe and in Japan and South Korea are now very high.
Coronavirus
This post was written by VP, Principal Analyst Andrew Bartels, and it originally appeared here.