Adjusted market scenarios

We have just started publishing adjusted market scenarios, which reflect the current market situation in May 2022. We have taken into account the latest economic scenario, our understanding of the global macroeconomic and geopolitical situation, and most importantly our discussions with market participants. We considered multiple factors (which partly interact with each other), including the war in Ukraine, broken supply chains and massive inflation.

The Covid crisis showed a strong resilience of IT investments and an evolution disconnected from GDP growth, with investments in digital transformation and its enablers (cloud, analytics/automation/ AI, security...) boosted by the pandemic. Now, while the pandemic was expected to subside, allowing for a return to normality (ao, mitigating supply chain challenges), the war in Ukraine is reinforcing the issues and risks. The IMF released new forecasts in April, with a notable slowdown in GDP growth on the one hand, and a massive acceleration in inflation on the other, but with significant differences between countries.

What are the consequences for the IT market?

First of all, unlike the Covid crisis, there is hardly any short-term halt to current projects, or even a postponement of future projects.

There is even a short-term increase in demand for nearshore/offshore resources to compensate for the closure of delivery centers in Russia, Belarus and Ukraine, which further reinforces the skills shortage.

Due to the combination of high inflation and a skills shortage, which reinforces the fluctuation of IT resources, salaries for IT specialists are increasing significantly. As a consequence, daily rates are increasing by about 5% for onshore resources/resources in mature countries and by nearly 10% for offshore resources/resources in emerging countries. Of course, these increases do not automatically apply to long-term projects/businesses/rate cards, but even then, prices are being renegotiated.

We are also seeing an acceleration in security investments, driven by both increased digital exposure and increasingly sophisticated and intense cybercrime. So far, the fear of further attacks originating in Russia has not materialized, but most companies and organizations are looking to prepare for them.

We expect acceleration in the defense sector (manufacturers and armed forces, although decision and procurement procedures tend to be cumbersome) and in the energy sector (renewable in the medium term, but also fossil fuel sources in the short term). There is also a long-term potential for relocation/reindustrialization in Western countries, by rebuilding production capacity, for example, for chips/semiconductors. All these initiatives will generate additional demand for software and IT services, both in technical/industrial environments (including embedded systems, SCADA, shopfloor, MES) and administrative environments (including ERP, CRM, customer care & billing).

Finally, this additional crisis reinforces the need for businesses to become more agile and resilient, both in and through IT, further accelerating the pace of digital transformation - with generic topics such as cloud transformation and application modernization, as well as more specific topics such as self-repair, remote operation, or software-define-anything.

Corporate social responsibility is also moving from a niche market to a real opportunity, with a strong focus on sustainability, as companies need to manage visibility and carbon footprint reduction - and as war accelerates the shift from fossil fuels to renewables.

Yet many companies still suffer from broken supply chains for multiple reasons: Ukraine and Russia due to war, China due to lockdowns impacting both production facilities and logistics/ports, while the chip shortage in Taiwan is still unresolved. Quite a few companies have also lost assets in Russia and/or Ukraine, which is hampering their ability to invest.

Some companies are therefore starting to be cautious and reprioritize; so far, they are the exception - but that could change if the war persists and resources (ao, energy for manufacturing) become scarce.

In terms of supplier performance and expectations, the first quarter has been very successful, with many suppliers posting double-digit growth rates. In addition, from our discussions, IT vendor order books and even pipelines are full, and demand is still outpacing vendor delivery capabilities. Finally, as already mentioned, the current crisis is accelerating price increases. As a result, growth in the first half of the year will be 2 to 3% higher than our growth scenario for the full year.

However, the risks of a slowdown in the second half of the year are considerable, due to massive inflation, the war in Ukraine and the disruption of the supply chain. At this point, we rule out a recession (although it could happen, for example, in case of a gas embargo and/or an extension of the war); this would dramatically worsen the scenario. As of today, we also rule out a quick end to the war and a return to normalcy; this would lead to a slight increase in our growth scenario. In our scenario we assume only a slight slowdown in the second half of the year. However, we must be aware that the situation is very volatile.

Our revised scenario is aligned with the IMF's April scenario and our ongoing discussions with market participants. In the end, we maintain our overall growth scenario for 2022 for the time being. However, we have made slight adjustments in some industries and countries, and we will closely monitor the situation and make further adjustments to our scenario if necessary in the coming months.