July 28, 2011
On Tuesday, we were ready to publish our mid-2011 global IT market forecast. It projected 7.4% growth in the US IT market in 2011, and 10.4% in 2012. Global growth in US dollars was forecast at 10.6% in 2011 and 7.6% in 2012, with the dollar rebounding in 2012 from its weakness in 2011; measured in local currencies to eliminate currency fluctuations, growth was projected to be 7.8% in 2011 and 9.1% in 2012. Our definition of the IT market included business and government purchases of computer and communications equipment, software, and IT consulting and outsourcing services — it did not include their purchases of telecommunications services, which are declining in the US and growing slowly globally.
Our forecast did recognize three threats to economic growth, and thus three risks to our forecast: 1) a failure to reach a sensible resolution to raise the US debt ceiling and start on a path to lower budget deficits; 2) a failure of European governments to reach a sensible resolution to the Greek debt crisis that lowered the Greek debt burden and reduced the risk of a broader debt crisis that included Italy and Spain; and 3) overreaction by China and India to rising inflation that reduced their growth.
As of last weekend, the second risk seemed to be defused, with the European Union and European Central Bank agreeing on a plan to reduce the Greek debt levels and provide new financing (though questions have since arisen as to whether this plan would be adequate). Meanwhile, on the first risk, President Obama and House Speaker Boehner were negotiating a deal that would raise the debt ceiling through the end of 2012 with deficit reduction of $4 trillion over 10 years through $3 trillion in spending cuts and $1 trillion in tax increases. Moreover, quarterly earnings releases for Q2 2011 from large tech vendors like Accenture, IBM, Microsoft and Oracle were all in line with our growth projections.
But then things fell apart. By Monday, the grand bargain was dead, House Republicans and Senate Democrats were scrambling to put together rival bills, and all the available options for resolving the debt ceiling increase would have negative impacts directly for the US economy, and indirectly on the global economy. And lower economic growth in turn translates to lower tech investment.
So, we pulled our forecast, because it was clear the projections described above were too optimistic.
Now, the question is how much to lower our forecast, and that will depend on what happens between now and August 2nd. Here are the scenarios as I see them:
- If the debt ceiling is not raised by August 2nd (or perhaps a day or so later), and the US goes into default, we will lower our forecast for 2011 US IT market growth to 5.5% in 2011 and around 7% in 2012. Global growth in local currencies would be similar, though growth in US dollars may actually be similar to those in our planned forecast, due to a sharp drop in the value of the US dollar.
That may seem a big change for a seemingly small event, but the implications of a default are quite scary. Faith in the creditworthiness of US government securities would be shaken, foreign investors would reduce their buying of US bonds, and interest rates would rise — not only on US treasuries, but also on US state and local governments. So, too, would interest rates on business and consumer loans. Financial markets would be disrupted, as investors looked for safer options, with loans becoming harder to get. Stock markets would fall even further than they fell on Tuesday, wiping out stock wealth and depressing spending. In an already weak economy, it is not hard to see US real growth shrinking to 1% in Q3 and Q4 of 2011 as a result, with effects lasting into 2012.
- If the debt ceiling is raised before August 2nd along the lines of House Speaker John Boehner's bill (with about $2 billion in spending cuts but the need to raise the debt ceiling again in 2012), we will lower our forecast for the 2011 US IT market growth to 6.5% to 7% and to around 7% in 2012. Local currency global growth would be 7% in 2011 and 8% in 2011.
Here, the damage would be three-fold — 1) near-term cuts in US government spending that would hurt economic growth; 2) the potential for a downgrade in the US government's credit rating, which would raise interest rates a bit, also slowing growth; and 3) a repeat of all the political disfunction that characterized this episode, with the attendant financial market disturbances. US real GDP growth in Q3 and Q4 2011 would probably be around 2% to 2.5% — about a percentage point lower than we assumed. Growth would also be weak in 2012, as all three sources of damage recur.
- If the debt ceiling is raised under Senate Majority Leader Harry Reid's proposal (with about $2 billion in spending cuts but the debt ceiling raised high enough to get into 2013), we will lower our forecast for the 2011 US IT market growth to 6.5% to 7%, but 2012 IT market growth would be 8%. Local currency global growth would be similar.
In this case, the first two sources of damage occur, but not the third. We would assume similar weak growth in the second half of 2011, but slightly better economic growth in 2012.
I want to emphasize that we continue to see the tech market outperforming the economy in the US, and to a lesser degree globally. As long as the US stays out of recession, we expect US tech investment will continue to grow twice as fast as US growth measured in current dollars (that is, without adjustment for inflation). While US businesses are proving reluctant to hire workers because of uncertain demand, they are showing themselves to be very willing to invest in technology that will allow them to cut costs and improve profits in the face of that uncertain demand. Even US governments, which have been cutting spending and hiring to eliminate budget deficits, are making fewer and shallower cuts in their tech investments, for the same reason.
In addition to awaiting the outcome of the Federal debt ceiling increase debacle, I will also be looking at the release of the US Department of Commerce's estimates for Q2 2011 GDP and tech investment. If those numbers are weaker than we expect, that would tilt our forecasts a bit lower; if they are stronger, that would edge our forecasts up a bit. Depending on when the dust settles around the debt ceiling increase, we will publish our revised global IT market forecast in either the first or second weeks of August.