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Channelnomics Original

Analysts: Don’t Expect a Speedy Economic Recovery

May 11, 2020

Forget the V-shaped rebound; think more in terms of a square-root symbol for describing market forecasts

The numbers were staggering and grim in the U.S. Bureau of Labor Statistics’ monthly jobs report released last week. More than 20 million Americans lost their jobs in April, and the official unemployment rate stands at 14.7%. In the technology sector, nearly 112,000 people lost their jobs – the worst decline since the dot-com bust of 2001.

If you don’t think the news could get worse, you may want to have a seat.

Economists and analysts are beginning to think the coronavirus recovery will look less like a V-shape, representing a speedy recovery, or even a W-shape, in which the economy will experience a double-dip recession. Instead, the current forecast looks more like a square-root symbol, in which the economy will go into a deep decline in the second quarter and recover to a subpar plateau for the foreseeable future.

In the first quarter (January to March), the U.S. economy receded 4.8%, with almost all of the losses due to the sudden economic stop caused by social distancing measures imposed in the last two weeks of March. Before social distancing, the U.S. economy was on pace to grow around 2%. On an annualized basis, the U.S. economy will shrink between 30% and 40% in the second quarter (April to June), reflecting nearly the entirety of the retail, hospitality, travel, and entertainment sectors shutting down.

The job losses aren’t over yet. White House economic advisor Kevin Hassett says the official unemployment rate could climb as high as 20% as cash-strapped businesses shed jobs in May and June. If that comes to pass, the COVID-19 recession could result in unemployment rates not seen since the Great Depression of the 1930s. 

Economists were saying the economy would start to rebound in the third quarter (July to September) as social distancing measures ease, businesses reopen, and people return to work. The full recovery would start in the fourth quarter (October to December), with rocketing growth as high as 10% as the economy returned to full capacity.

The anticipation of that scenario is fading, though, as it becomes increasingly clear that the economic restart won’t happen quickly or uniformly. While New York, the epicenter of the U.S. COVID-19 crisis, is seeing its infection rates decline, other parts of the U.S. are reporting increases. In countries around the world, secondary waves of infections are increasing, causing some countries to return to social distancing measures.

Even as social distancing eases, the mitigation measures will continue for the foreseeable future. Government officials are telling businesses to adjust their work environments to safeguard against the spread of the virus. Some companies – including Google and Facebook – are allowing their employees to work from home through the end of 2020. And many companies aren’t planning to return to live events until the middle of 2021. All of this will have a knock-on effect that slows economic recovery.

Forrester Research concurs with this outlook. In a note released by channel analyst Jay McBain, Forrester says there’s a 60% chance of a low-growth recovery extending into 2021. In its most probable outlook, Forrester sees the economy slogging along under the pressure of a continued COVID-19 threat. As businesses either cut budgets or conserve cash, Forrester believes tech spending will take a hit through the middle of 2021.

Economic outlook, though, is circumstantial. Many vendors and solution providers are reporting robust business – particularly those in cloud services, unified communications, and security. Vendors and partners serving specialized verticals, including health care and education, are also seeing surges in demand.

Forrester correctly notes that customers see managed services as essential to their operations. However, MSPs are feeling a pinch as they cope with surging demand for support under existing contracts. In other words, MSPs are working harder without additional sales or compensation. Worse, the SMB level of managed services is under stress as their customers have extended their service payments or canceled contracts.

Where the most pain is being felt is in IT infrastructure and large-scale integration projects. Vendors and partners say they’re seeing cash-flow disruptions as customers pause IT projects, even those related to digital transformation. Despite the increased availability of credit and financing, solution providers tell Channelnomics that customers are reluctant to take on debt amid so much uncertainty.

Despite the challenges ahead, the channel remains cautiously optimistic. In The 2112 Group’s recent study, Evolving Impact of COVID-19 on Vendor Channel Programs, 53% of channel chiefs and managers expect to meet or exceed their original 2020 sales targets. Another survey of solution providers by 2112, COVID-19 Impact on Channel Partners, found 57% expect to hit or exceed their original 2020 sales goals.

While it’s unclear how much of an impact the pandemic will have on the channel, it’s increasingly clear that the recovery will bring benefits to some and pain to others based on their products, business models, and maturation.

The 2112 Group, which publishes Channelnomics, continues to track the pandemic’s impact on the channel and make all of its COVID-19 reports free to download.