The Odds Of A Tech Market Decline In 2020 Have Just Gone Up To 50%
Based on recent events, 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 the US and other major economies have declined in the first half of 2020 but manage to recover in the second half. There is also a 50% probability that US and global tech markets will decline by 2% or more in 2020 if a full-fledged recession hits. In either scenario, computer and 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 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 for remote work and education as firms encourage workers to work from home and schools move to online courses.
Behind this downward revision in our tech market outlook is a sharp deterioration in the economic outlook. Two recent announcements significantly increased the risks of an economic recession, both in the US and globally:
- The World Health Organization declaring COVID-19 to be a pandemic. This announcement underlined the gravity of the disease and its broad impacts on public health, even death.
- President Trump declaring a national emergency, confirming the threat of COVID-19 to our nation and the global economy, along with dramatic US travel restrictions, particularly internationally.
The NBA, NHL, NCAA, and other sports canceled or suspended games; cultural events such as SXSW and business conferences were canceled; 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.
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 healthcare spending if needed. Businesses, hunkering down in response to the US/China trade war, will postpone major investments in light of 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% to 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 will happen beyond Q1 and Q2 of 2020. The Federal Reserve has already lowered interest rates. The President signed an $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 some kind of economic stimulus package. Lower oil prices are a boon to consumers. But 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 a broader stimulus can help speed recovery. We don’t know yet how these negatives and positives will play out. The odds have risen to a 50% probability of a US recession, with at least two quarters of declining 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.