The swift and massive shock of the coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to World Bank forecasts, the global economy will shrink by 5.2% this year. That decline represents the deepest recession since the Second World War, the World Bank says in its 2020 Global Economic Prospects. Among the worst affected are advanced economies, which will shrink by 7% on average in 2020 as domestic demand and supply, trade, and finance are all severely disrupted.
Economic downturns affect each industry differently and the tech sector has a track record of doing quite well. The deep recession of the early 1980s gave birth to the personal computer era, for example, turning Apple and Microsoft into the companies they have become. While the milder recession of the early 1990s lead to governments essentially handing control of the internet over to the private sector, which then laid the seeds for the dot-com boom giving rise to Amazon, Google, and many more. The 2008 recession also hit the technology industry much less harshly than the rest of the economy, allowing the biggest tech companies in the world to become the biggest companies in the world.
Since July 2009, Apple increased its stock price by almost 900%, Amazon by more than 2,000%, and even Microsoft, often seen as “out of touch” in the current era, saw a 400% rise. Many startups and smaller companies during the time of the last recession have gone on to become disruptive forces across the world, Salesforce grew by more than 1,400% and Netflix more than 5,000% since 2009, for example, while Uber, Airbnb, and others have also thrived. We have already seen the crucial role of technology in supporting our lives during the pandemic induced lockdowns and social distancing, suggesting that industry may be set to ride even the “deepest recession since the Second World War”.
Maybe not, according to many analysts who have been exploring this very question and forecasting the impact on tech companies for 2020 and 2021. Forrester Research, for example, has set out three potential scenarios for the tech sector through the post-COVID downturn:
Scenario A – 30% probability: Best case, the pandemic peaks, having the largest economic impact in Q2 and Q3, but rebounding in Q4. It would result in US tech spending falling 5% in 2020.
Scenario B – 60% probability: Pandemic and economic contraction last through 2020, with recovery in mid-2021. It would result in tech budget spending cuts of 9% this year and 5% in 2021.
Scenario C – 10% probability: The pandemic recurs and the economic downturn extends into 2021. Deep and long revenue declines would cause companies to breach or renegotiate contracts. “Modeling these impacts is not possible at this time,” Forrester said.
We are running out of time for Scenario A and the pandemic seems far from over, leaving the worse scenarios B and C for the tech industry to ponder, but who can really predict what will happen in these unprecedented circumstances? We were overdue a recession before the pandemic started and subsequent stimulus packages have only postponed the real economic impacts of the crisis. The hard economic truth of this pandemic is still to show it’s face, but it certainly feels like this is no ordinary downturn.
For tech, however, the reaction to the pandemic has only pushed further into the technological world, as we depend on it to maintain work and personal lives virtually, while social distancing. The longer the pandemic continues the deeper we go and the more dependant we will become, which supports long-term growth for certain tech sectors at least.
Occupancy analytics for social distancing, contactless and voice technologies, and services that support remote work standout for a COVID-boost, for example. The one thing we know for sure is that the next few years will be turbulent for the tech industry, as they always are during severe economic slowdowns.
Startups could struggle with the lack of funding available but the best ideas will always attract attention. With big companies divesting from or completely abandoning risky or underperforming assets, there will be more space in the market for new companies to tackle those areas with innovative approaches, leading to some big success stories and numerous failures.
In the PropTech sector, big companies will focus on core building systems and those that support pandemic relief and social distancing policies. Indeed some systems could find a new public health platform to justify privacy infringements if the pandemic continues, potentially redirecting pre-COVID trends in The West towards a more Asian style surveillance infrastructure.
The short-term future of the tech industry does not look great, but it is a lot better than some other industries facing the deepest recession since the Second World War and a pandemic that restricts their normal operation. However, recessions are a “natural” part of our economic system, a necessary cleansing of the deadwood that allows the strongest companies to grow, which creates new space for innovative startups.
How the pandemic will make this recession different is yet to be fully understood, but crises can unite people, and this crisis may still be the one that brings us together to create a more resilient and sustainable economic system for long-term future prosperity.