June 2, 2012
Haven't we seen this show before? Like last year? Once again, Europe wrestles with and is again losing against its debt crisis. Once again, after some promising growth in late 2011, the US economy is showing signs of losing steam. Once again, China and India are flashing distress signals. And once again, John Boehner and the Congressional Republicans are threatening to refuse to raise the US debt ceiling unless US Federal spending is cut sharply.
Last year, the mid-year economic troubles did take their toll on tech purchases in the third and four quarters of 2011, but a last-minute resolution to the US debt ceiling issue, the European Central Bank's aggressive lending to banks so they could buy Italian and Spanish government debt, and some strength in US consumer spending, Germany's surprisingly strong growth, and continued growth in China revived global economic growth in Q4 2011 and into Q1 2012. Much depends on whether this pattern of slump and revival will recur again in 2012. My bet is that we will in fact see the same pattern.
So, let's look at the economic evidence, and then the tech market evidence.
- US economy slows but continues to grow. In the US, the US Bureau of Economic Analysis on May 31 revised down Q1 2o12 real GDP growth to 1.9% from 2.1% in the preliminary report, and on June 1 the US Bureau of Labor Statistics reported that a disappointing 69,000 increase in payroll employment in May, the second month of sub-100,000 job growth. On a more positive note, US retailers and auto makers reported good sales growth in May, while gas prices at the pump continued to fall from peaks earlier. My take is that we will see real GDP growth in the 1.5% to 2% range in the remainder of 2012, down from my earlier assumption of 2% to 2.5% growth.
- Canadian economy grows at similar pace to the US. On June 1, Statistics Canada released its data on Canadian GDP growth in the first quarter of 2012, showing 1.9% growth (at a seasonally adjusted annual rate from the prior quarter) after the same growth in Q4 2011. As with the US, there's a mixture of strength and weakness in the Canadian economy, which suggests similar growth is likely for the rest of 2012.
- China growth slows sharply, but Chinese government responds quickly. Several economic reports from China showed growth slowing from its customary 9%-12% to the 7%-8% range or possibly lower level. However, Chinese officials responded quickly, adjusting reserve requirements to encourage more lending, taking steps to weaken the yuan renmimbi to stimulate exports, and announcing other policies to support growth. While some commentators worried that the forces of weakness like weak external demand from Europe and the US, the bursting of the Chinese construction bubble, anemic consumer demand, and leadership power struggles would push China closer to recession, most analysts expect the government response will restore growth.
- Japan continues its slow but steady recovery from 2011 natural disasters. The second largest economy in the world has been rebuilding from last year's earthquake, tsuanmi, and nuclear power plant disruptions, and will likely be a net positive for the global economy in 2012.
- India economy struggles with structural problems and stalemated political leadership. Like China, India has been showing clear signs of slowing economic growth, with growth of 6.5% for fiscal year 2011-12 reported last week. India's manufacturing and agriculture sectors grew by just 2.9%. Unlike China, there are few signs that India's government has the political strength to undertake the structural reforms or stimulus that could reverse this course, so India will be a drag on the global economy.
- Europe teeters on the edge of a euro break-up and a much deeper recession. Europe is clearly the biggest worry in the economic outlook. Already in a mild recession as a whole, Europe faces some alarming trends. Greek elections could put in office a government that will pull Greece out of the euro, which would then put pressure on banks and governments in Italy and Spain. There are already signs of money leaving banks in Greece, Italy, and Spain for German banks, raising the risk of a banking crisis that the governments in these countries will be unable to resolve on their own. The rapid decline in the value of the euro during May — it fell to $1.22 per euro on June 1 — is a sign of investors losing confidence in the euro. The head of the European Central Bank on May 31 urgently called for steps like a European-wide bank deposit insurance system and unified European bank regulation to deal with the banking crisis, though without backing measures like the issuance of Eurobonds that many economists believe are needed to deal Europe's debt problems. As in the past, I expect that harsh economic realities will cause European leaders to do just enough to keep the worst from happening, but not enough to put Europe back on a growth path.
Turning to the tech market, the slumping economies of Asia and North America and the recession in Europe has clearly slowed growth in global tech purchases, though with uneven regional impacts.
- Tech vendors' global revenue is growing in low single digits. Summing up the revenues of the 49 tech vendors that we track, growth was just 2% in Q1 2012, similar to the 3% growth in Q4 2011 and the 3%-4% growth rates projected by vendors for the next two quarters. Communications equipment purchases continue to decline; computer equipment purchases have slowed to a 2%-3% rate from double-digit growth in early 2011; and IT consulting and services purchases showed no growth in Q1 2012, with prospective growth of 2%-3% in coming quarters. The one bright spot was software, where growth in Q1 2012 was 7%, though that was also down from growth rates of 10%-15% in 2011.
- The US tech market is growing in mid-single digits. Tech vendor's US revenues rose by 4% in Q1 2012, the same as in Q4 2011, with communications equipment vendor revenues falling, computer equipment vendors flat to up slightly, IT services revenues rising by 4%, and software revenues expanding by 9%. The US Bureau of Economic Analysis's revised data on business investment in information technology for Q1 2012 showed 5.5% growth from the prior year, with computer equipment investment up 12%, communications equipment investment down by 8%, and software up 8%. Note that this data does not include government purchases of technology, which are likely to be weaker than business investment.
- The European tech market is showing weak growth, despite recessions. Measured in euros, vendor revenue from Europe grew by 3% in Q1 2012, the same as in Q4 2012. Software showed the strongest growth, at 8% in euros, while computer equipment rose by 4%, IT services by 3%, and communications equipment fell by 1%. However, growth in all categories is likely to weaken as the recessions that began in Q4 2011 or Q1 2012 impact tech buying in subsequent quarters.
- Asia Pacific tech markets (measured in US dollars) slow to single-digit growth from double-digit in 2011. The vendor revenue for the Asia-Pacific region grew by 3% in Q1 2012, compared with 7% in Q4 2011 and growth of 15% to 20% in earlier quarters. Much of this slowdown is due to the dollar's weakness against the major Asian currencies in Q1 2012 compared with Q1 2011. Still, tech demand in China, India, and Australia appears to have grown more slowly in Q1 2012 than in earlier quarters. As in other markets, weakness was mostly in communications equipment and IT services, with software posting the best growth. We expect growth will improve in coming quarters, though still remaining below 2011 growth rates.
While I still retain a moderately positive outlook for the US and global tech markets despite the dark clouds, the risks of a tech downturn that follows a deeper recession in Europe and slower growth in the US and Asia Pacific have now risen to around 30%.