Tag: economy

4.7/5 (3) The last week or so has seen a numbers of central banks (such as the US and Australia) ease their monetary policies – lowering interest rates in order to stimulate investment and economic activity. But this alone won’t be enough to slow down economic growth – the generally accepted wisdom is that governments will need to quickly roll out stimulus packages to get money into the economy faster. Some countries, like Hong Kong, have already kicked off this process – others are likely be announce packages over the next few weeks.

Typically, these stimulus packages are designed to get the economy moving again – bringing forward existing spending plans or creating new spend. Good stimulus packages will have a broad impact but also drive improved business and employment outcomes. Some are targeted towards the sectors most impacted (e.g. in Australia the seafood export market has been impacted heavily by China’s decision to stop importing any seafood; in Thailand the tourism sector is hit hard by the slowdown in arrivals from China – that makes up a large percentage of the tourists in an economy where tourism is a significant sector).

But often they are not targeted. Some governments might just let businesses write off any investment faster than usual (such as within a single financial year instead of depreciating the spend over a number of years) or will just send a cheque to every income earner. The issue with these stimulus packages is that they don’t drive a specific outcome apart from getting spend into the economy faster. Stimulus packages have an opportunity to drive change – and the COVID-19 virus has shown that some businesses are not well equipped for the digital era. They are finding it hard managing the distributed workforce when they ask their staff to work at home. There are also many challenges that governments and businesses are facing in serving customers across digital channels.

This is the opportunity for governments to stimulate the economy and help businesses improve the digital experiences of customers and employees. The world is going digital – we all know what good digital experiences look like as we have them on our smartphones in our pockets. But we also know that most companies and government agencies we deal with are not offering great digital experiences… And while we all hope that virus outbreaks such as COVID-19 don’t happen that often, we know that something like this will happen again – so it would be great if businesses were prepared for such an outcome.

Therefore now is the chance to target the stimulus packages towards both the impacted sectors of the economy as well as the areas of spend that will drive better digital experiences for customers and employees. There could be incentives to spend more on software and cloud services, spend more with consultancies or spend more with digital marketing agencies. It will also help small businesses compete with larger businesses on an equal playing field (for example, the large takeaway food outlets have an app that lets you pre-order food, but many small ones do not).

In 2009, the Australian government rolled out a stimulus package – one that was ultimately one of the major reasons the economy came through the global financial crisis without falling into recession. They gave an immediate cash stimulus to taxpayers which helped get an immediate spend in the economy. They also had a housing insulation spend which promised roof insulation for 2.7 million homes – this provided stimulus to the economy in the mid-term. They then provided new school halls, social housing and roads – which provided the stimulus in the longer term. While it can be argued that the programs were not effectively administered, the stimulus got the economy moving and also helped the government hit some longer term goals – such as reducing greenhouse gas emissions (through better housing insulation therefore less use of electricity to heat and cool homes) and also upgrading aging infrastructure in schools across the country. For many businesses, the focus today is on providing great customer experiences – and many of those experiences will be digital. Governments have the chance to use their stimulus p to accelerate that outcome.

2020 was originally forecast as a good year for technology spend. Many categories took a hit in 2019 – hardware, telecommunications, datacentres – even the software and IT services segments came down from their high growth rates of previous years. The consensus for growth in IT spend in 2020 was somewhere between 3-4%. But that growth is now under threat by the COVID-19 virus that is spreading across the globe. The 26th  February was a significant day, as the number of new infections outside of China is now greater than those in China. Furthermore, the growth in infections is not isolated. Iran, Italy and South Korea all have experienced significant growth and the virus has hit Brazil, directly from Italy.

With the situation changing every day it is hard to have a firm view on how it will impact broader economic growth as well as the technology spending. Much will depend on the ability of countries to control the spread of the virus along with the fiscal stimulus packages of governments across the globe. Some countries are in a better position than others to push money into economies to keep them growing.

But even with the uncertainty, it is worth noting some feedback we are getting from tech buyers, vendors and economists. While much of this feedback is anecdotal, we believe it is indicative of trends across the market. The next few weeks are critical. If China shows that they can stop the transmission of the virus, that will help global confidence which has been hurt by the newer outbreaks in Italy, Iran and Korea.

Overall Economic Spend is Slowing

Businesses across the globe – particularly those in heavily impacted economies (such as China, Italy, Japan & South Korea) and those impacted by the slowdown in China (Thailand, Australia etc) – are putting the brakes on spending across the board. And there are not too many initiatives in businesses today that don’t involve technology. We are seeing projects delayed and – more rarely – cancelled. Several central banks, such as those in Thailand and Singapore, have lowered their growth forecasts, as has the IMF and OECD. Ratings agencies and economists have also reduced their growth forecasts for heavily impacted economies. The USA is avoiding much of the slowdown although the Nasdaq High Tech Index was down around 8-9% on the 28th February – the market has priced potential future slowdown into share prices already.

Limited Face-to-Face Collaboration Will Slow Tech Spending

We are also seeing the projects that are underway slowing down: more staff are required to work from home; experts can’t fly in to help drive projects; and without teams meeting physically, collaboration has become harder than ever before.

This doesn’t mean the projects aren’t happening – the timelines are slipping. Will this impact the overall spending in 2020? Yes! But not by much at all, as many projects these days are delivered in 3-6 months – not 24 months like years gone by. So, delivery will mostly happen in 2020, but more in the second half than the first half. But again, with the situation changing every day, the scenario might change. As soon as growth in the number of infections slows down and the travel bans are lifted, we can expect activity to slowly return. But the further out that is, the more projects will decrease scope, be cancelled or be shelved for another day.

Another factor impacting innovation and the resulting technology projects is the lack of face-to-face collaboration between management teams. Some businesses have already put into place initiatives to ensure their board and executive management do not meet face-to-face. This is because they are considered the most valuable assets to the business – and are often likely to be in the age group most heavily impacted by the coronavirus (over 50). While not suggesting that collaboration cannot happen in virtual environments, it is sometimes a shared experience or non-business interaction that might drive a new idea for the business. And that idea might end up driving tens of millions of dollars of technology spending.

Cash Flow is Impacted – Which Slows Business Investment

Cash flow is already being impacted. Small and medium enterprises (SMEs) are already feeling the pinch, and they don’t have access to the funding tools that many large businesses use to get through tough times. SMEs really represent the biggest threat to spending: if a large business has to lay off some staff, they can then get a project going as soon as the economy or their sector recovers and employ the people they need, as required. But in countries like Australia and the US, small businesses represent almost 40-50% of economic activity. If SMEs shut down or even restrict spending, it takes some time for new businesses to start up and fill in the gap they leave. SMEs don’t tend to buy software or services from the large vendors – they tend to use small and medium services and software providers – so it is these smaller technology businesses that are immediately threatened if the coronavirus spread continues. The multiplier effect quickly comes into play here to reduce consumption, employment and economic activity.

We are also aware that some businesses that are directly impacted by the virus (such as those in the travel sector) have informed their suppliers that they won’t be paying any bills until mid-year. This could also put a small technology provider under – whereas a larger one should be able to survive the cash-flow crisis. Despite most economies having a low interest rate environment, the access to capital is not easy, particularly given the risk to the overall economy. A further challenge to global expenditure and an accelerated recovery is the US elections which provide distraction to businesses in the US and globally.

Cancellation of Customer Events Will Limit Technology-Led Innovation

Many vendors have cancelled or postponed their customer events, even in relatively unaffected markets such as Australia. And nearly every vendor will attest to the spike in opportunities and deals that get signed after these events. The coming together of potential and existing customers with thought leaders, tech evangelists, bleeding edge customers and the partner ecosystem drives new ideas. Individuals get inspired to act – they hear about best and next practice and kick off conversations within their businesses. They see how technologies can impact other businesses and use those assumptions within their own business cases. Sceptical customers become converts, and those already considering projects sometimes accelerate them.

With these events cancelled tech spending will not collapse. Companies still have budgets and these budgets will be, for the most part, spent. But it is the innovative initiatives that will suffer – the exploration of new technologies or services, the experimentation and testing that won’t happen because people simply won’t know about it. This is the spending that is typically not budgeted for – the new spend that often has a big impact on business results and customer outcomes. These customer events are learning opportunities – without the events the learning will be harder and slower to push out. So, this will likely have more of an impact on spending in calendar Q2-Q4. But without other assets in the market or other chances to educate clients and prospects, this spend simply won’t happen.

The COVID-19 virus is also impacting the technology supply chain. Many technology products are manufactured in China – or rely on components manufactured in China. Factories across China have been shut down – and while some are coming back online, it is hard to know how long it will take them to get back to full capacity. Transport services in China are impacted –globally 200,000 flights have been cancelled since the public emergence of the coronavirus. Some products are waiting but just cannot be shipped. A number of vendors have flagged the impact of the slowdown to the supply chain on their revenues, including Apple and Microsoft. With limited supply, prices are rising, which slows down demand. While this may show some short-term opportunity for the cloud providers, the hardware companies and the software providers that rely on the availability of hardware will feel the impact. In the longer term, it may lead to business reviewing their supply chain and risk analysis. This presents an opportunity for India, Vietnam and other potential manufacturing hubs.

The Overall Impact of the COVID-19 Will be Real and Measurable

Ultimately, we believe that the coronavirus will wipe up to 1.5% off the total tech spending for 2020 – bringing the overall average down to between 1.5% and 2.5%. Part of this is based on the fact that technology spending is coming off a poor year. Confidence was just starting to climb with some of the hardest hit segments expected to return to growth in 2020. This confidence will disappear – and could lead to further price competition. Which is good for the buyer but bad for the whole vendor supply chain!

But again, this depends on the response of central banks and the ability of countries to control the spread of the virus. The development of a vaccine would be ideal but appears to be highly unlikely. The sooner it is brought under control – along with effective targeting of fiscal stimulus packages – the lower the impact on overall economies and the technology spending of businesses.

Some sectors will witness growth – telecoms providers, collaboration software and tool providers, remote and online education providers, cloud providers and healthtech will all witness growth – in fact many are already! Digital spending will increase as face-to-face opportunities plummet – this will drive opportunities for advertisers, digital agencies and developers.

Now is the time to make contingencies – vendors need to get better at digital marketing and selling and simpler implementation. Tech buyers and implementers need to put in place best practices for remote working – many companies witness an increase in productivity when they get remote working right.

Please let us know your feedback or thoughts in the comments section – we look forward to keeping the analysis going – and stay healthy!