One of the most high-profile winners from the lockdown imposed to contain the coronavirus pandemic was the tech sector, as businesses accelerated plans to increase flexibility across their operations.
IT services were pivotal in facilitating flexible working practices such as giving employees and clients access to business functions from remote locations. Business functions that were automated through technologies such as artificial intelligence or robotic process automation were less impacted by restrictions on workforce mobility. And demand for cybersecurity also benefitted, as firms moved to ensure a cybersafe work environment.
Some of these practices have become mainstream, and will continue to underpin ongoing expenditure of enabling technologies.
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But as the world enters a new post-Covid-19 era overshadowed by the war in Ukraine and a spike in inflation and borrowing costs, there is a danger that the market has got ahead of itself. Growth has cooled and the tech sector may have overestimated the market for IT services.
The industry is aware that there has been a hiatus in demand in the wake of reports of widespread layoffs from the likes of Meta, Amazon, and Google. But the retrenchment in demand will be more intense that many in the industry are expecting.
Boom and bust
Taking average growth in 2020 and 2021 as an optimistic view of permanent shifts in pandemic-led demand and comparing against our latest forecasts, the US tech sector may have overestimated the market for IT services by more than $120bn by 2030—equivalent to a fifth of US sector’s entire output in 2023.
There are two factors driving this. The first is the old-fashioned economic cycle, or boom and bust. The world economy is going through its own cycle, and the sector’s fortunes are still linked to broader macroeconomic conditions.
Our forecast for the economic growth in 2023 is subdued: activity is pulling back due to the general slowdown in business investment. Fixed capital investments account for approximately two-thirds of total IT services output.
Meanwhile the US Federal Reserve is aggressively raising rates to control inflation, which will stifle further business investment appetite into the sector.
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Second, tech investment is expected to cool due to a reversion of the elevated activity caused by the pandemic. Advertising revenues and demand of IT services increased, and tech firms bet on this strong growth continuing. Employment within the information sector grew at the quickest rate in two decades in 2020 and 2021.
Recently this trend has switched: now firms are cutting back their IT spending after the recent flurry or investment. Tech investment is expected to cool due to a reversion of elevated activity caused by the pandemic. Many blue chip companies, including Alphabet and Twitter, have reported heavy job cuts in recent months. This is a clear indication that the sector is expected to slow during 2023.
Despite this double whammy of a turn in the economic cycle and firms cutting back after elevated invested during the pandemic, the essential nature of services to the daily running of businesses ensures that absolute growth rates still outperform the wider economy.
While this is consistent with earlier recessions — including the coronavirus pandemic and global financial crisis — the danger is that the industry will ignore the warning signs until too late. Even as we move forward and learn to live with Covid-19, the impact of the pandemic will continue to shape the future.
Max Anderson is a senior economist, industry at Oxford Economics.
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