Some Guidance on the Outlook For Tech Markets

BY ANDREW BARTELS

The outlook for tech markets remains uncertain, with a wide range of scenarios. We at Forrester continue to operate with three scenarios for tech market growth in the pandemic:

1) Best-case scenario of a relatively short two-quarter recession with quick bounce-backs.

2) Middle-case scenario, which now looks most probable, with recessions lasting through 2020 and early 2021.

3) Worst-case scenario, in which recessions continue well into 2022.

New data and evidence are starting to narrow the boundaries of uncertainty. As we work on preparing for the US and global forecasts for tech markets, I wanted to share some of the inputs that are going into the analysis. Please remember that any projections here are forecasts for what we think will happen, not recommendations on what CIOs and tech decision makers should do. That advice will be in separate reports.

• OECD provides estimates for real GDP shortfall in different countries based on the length of containment efforts. On March 27, the Organisation for Economic Co-operation and Development (OECD) published a report estimating the potential first order or direct impacts of the coronavirus containment efforts for different countries (see the OECD updates G20 summit on outlook for global economy press release). The report estimated that real GDP would decline at annualized rates of 20% (China and India) to almost 30% (Spain and Germany) if the coronavirus containment efforts lasted for the whole year. If those containment efforts last for one month, the annualized impact would be one-twelfth of these numbers; if they last for three months, the annualized impact would be one-quarter; if they last for six months, the annualized impact would be one-half. The report estimated the biggest direct effect by industry would be in professional and real estate services; retail and wholesale; hotels, restaurants, and air travel; construction; other personal services; and transportation manufacturing. It did not attempt the second order or indirect impacts on other industries such as financial services, healthcare, education, utilities, governments, or other types of manufacturing and transportation. The full report provides estimates of about 36 countries. Here are the key takeaways:
  1. Germany, Greece, Mexico, Spain, New Zealand, and Sweden would be the hardest hit. This is a potential GDP hit of 28% or more. Tourism is a big part of the Spanish, Greek, Mexican, and New Zealand economies, which is why in this model they would be hit hardest. Germany and to a lesser degree Mexico, Spain, and Sweden are vulnerable due to big auto manufacturing sectors. Sweden or New Zealand is likely to experience relatively short one-quarter shocks. Germany, Greece, Mexico, and Spain should expect a likely drop in real GDP to last for at least two quarters.
  2. The US, Canada, France, the UK, and Italy would experience potential quarterly declines of 25% for two or three quarters. These countries include some of the largest tech markets in the world, so their economic declines will have an outsized impact on the overall global tech market. But they also have relatively robust healthcare systems and aggressive government-backed stabilization programs that may be able to limit the scope of the pandemic and necessary containment efforts to two quarters. South Korea, Turkey, and Russia are projected to have slightly smaller declines in real GDP, but those shocks are also likely to last for two quarters or more.
  3. India, China, and South America would face real GDP declines of around 20%. China has already demonstrated how aggressive containment efforts can flatten the curve of infections and limit the duration of those efforts. South Korea and Singapore have followed similar paths, with the steep declines in real GDP likely to be kept down. India just launched an aggressive stay-at-home policy, which may achieve similar results. However, there are early signs of a potential resurgence of the coronavirus in China and some concerns of undercounting, so containment efforts will likely continue in these countries, though on a more targeted basis.
• We will adjust country outlooks based on government stabilization efforts. OECD projections are based on the structure of each country’s economy and the state of the pandemic. The public safety nets and government economic stabilization efforts may contain economic damage or shorten the length of the recession. For example, Denmark, Germany, and now France have policies that pay companies during downturns to keep employees on their payrolls, rather than laying them off and turning them to collect unemployment insurance. These policies seem likely to speed recoveries, since employees are already in a ready position to meet reviving customer demand. The $2 trillion US economic stabilization plan has similar elements in the form of small business loans that turn into grants if firms retain employees. Each country’s various forms of healthcare coverage and income support programs will also impact how they experience the recession.
• The International Monetary Fund (IMF) is likely to issue its World Economic Outlook report this week. This report, which normally comes in early April and early October of each year, provides IMF forecasts for nominal GDP and other economic indicators for more than 200 countries. That data underpins our global tech market forecasts. We have found over the years that projected growth in nominal GDP is the best single predictor of tech market growth in a country, just as overall revenue growth in an industry is the best predictor of its tech spending growth. So we look forward to this report to provide a baseline for our tech forecasts of the leading economies’ tech markets. Of course, it is possible that the IMF’s World Economic Outlook will be delayed, as their economists are almost certainly struggling with the same uncertainties that we are.