With the latest technology earnings season kicking off in the US, macroeconomic issues are looming large.
An industry that likes to focus on microeconomics – where the next disruptive change will come from, or which dominant firm is about to take its market share out of it – is suddenly faced with an extraordinarily large number of geopolitical and macroeconomic facing economic challenges.
Inflation and the shift in the interest rate cycle have raised questions about rising costs “especially in a tense IT labor market” and weak demand. Russia’s military intervention in Ukraine has reduced marginal sales for many companies, but more importantly, it has damaged supplies of key materials and injected a new level of uncertainty into the world economy. China’s harsh response to the COVID-19 outbreak is just the latest challenge to threaten global supply chains – and another reason to worry about the slowdown in the country’s economy.
Although it led to a bumpy start to the year, IT demand stabilized at an exceptionally strong level stemming from the pandemic. The whole thing seems to be leading to massive volatility as companies try to withstand external shocks for their global supply chains and operations, with varying degrees of success. But it also indicates that some key drivers of the IT industry are still performing well.
One concern is the strength of consumer demand. The first example came in the form of this week’s shocking new subscriber numbers on Netflix. The competition from new competitors in video broadcasting has been threatening for a while, but other forces have also taken hold this year. Netflix executives cited the “overflow effects” of the Russo-Ukrainian war on Central and Eastern European countries, along with “aggregate tensions” in a number of economies, including in Latin America.
It is unclear how much these factors contribute to the deficit. But as higher energy prices eat up more consumers’ wallets, how many more people will decide this year that it’s time to cut their spending on electricity services? And what other consumer services would you start showing stress?
Another sign was the sharp turnaround in the computer market since the beginning of 2020. After it died before the pandemic, computer sales came back to life, with employees working from home. The number of devices sold last year rose by 15 percent to 341 million, the most in nearly a decade, according to Canalys. But Gartner figures show that sales fell by about 7 percent in the first quarter of 2022.
Purchasing new devices is usually the first thing that stops when consumers and businesses start to feel insecure. In other parts of the IT market, by contrast, things look very different.
Long-delayed IBM this week released a surprisingly prosperous announcement about future earnings following a revamp in which a large portion of its business services were split. According to Arvind Krishna, CEO of IBM, the demand for information technology is four and five percentage points higher than the growth rate of GDP. Except for “something more catastrophic” he predicted, demand will continue at this rate, even during a mild recession.
After all, the optimistic view is that the shock of the pandemic has prompted companies and governments to accelerate plans to digitize their operations. IT buyers are starting this year with plans for more spending growth than they did at the beginning of 2020 before the pandemic, even though the economic outlook is now uncertain, according to John David Lovelock, senior forecasting expert at Gartner.
It seems that 2020 was a recession year. But that was followed by a nearly 10 percent increase in IT spending last year, and Gartner expects the global IT market to expand by $ 4.3 trillion at a faster pace than the years before the pandemic, with a growth rate of 4 percent this year to 6.6 percent. sent in 2024.
To feel the effects of this growth would be very unequal. Expenditure on new technology has long been disproportionately focused on the areas where companies have the greatest impact on their business. In recent years, this has meant things like cloud computing, analytics and security, which companies hope will make them more operationally flexible and more responsive to both customers and new market opportunities.
The forecast, if correct, indicates a strong background for the industry as a whole, and a starting point for continued extremely high growth rates in the key pillars of information technology. Whether investors will give growth rates the same high multiples they gave before the recent stock market correction is another matter.