Impact of the U.S. Recession on the I.T. Industry

The Current Scenario of the U.S. Recession- How Bad is it?

The stance of stock markets around the world is intriguing. Fears of an impending U.S. recession have caused sharp market corrections, but expectations of a slower-than-expected decline in global GDP have sparked new buying. The market’s increased volatility suggests that the trend is ambiguous. The most significant market uncertainty is how severe the ongoing global growth slowdown will be. The U.S. could likely have a recession. It is also likely that the Fed will be successful in causing the U.S. economy to fall gently. What should investors do, given the current state of affairs?

It’s terrible news for the global economy if the U.S. enters a recession by the end of 2022 or the initial days of 2023. The U.S. economy’s $25 trillion potential recession will have an effect on world growth. Exports from emerging markets (E.M.s) like India may suffer due to adverse global trade effects. Equity markets are taking these worries less seriously. The S&P 500 has declined by almost 20% since its high. Nifty’s correction from its top was over 18%. A US recession has it been discounted by the markets? Partially “yes,” But have markets already factored in a devastating U.S. recession? The response is “no.” Global equity prices have not yet caught up with the potential effects of a severe U.S. recession and the slowdown in China and Europe.

Having said that, a gentle landing for the U.S. economy is our baseline scenario. It is more likely that a mild recession will occur in the U.S. than a severe one, even in the worst-case scenario. The U.S. economy is still expanding quickly, and the unemployment rate of 3.6% is unexpectedly low. Jerome Powel, therefore, has a fair probability of hiking rates in 2022 without causing the economy to enter a recession. Allen Greenspan did this in 1994.

Politicians, economists, and market experts argued vociferously about if the U.S. economy was in a recession in the summer of 2022. Politics always played a role in the debate, which ultimately boiled down to the definition of a recession.

According to the usual definition, which calls for two successive quarters of negative gross domestic product (GDP),  the United States experienced a recession in the summer of 2022.

The National Bureau of Economic Research (NBER), which establishes U.S. business cycles, holds a different perspective. As defined by the NBER, an economic recession is a significant decrease in economic activity distributed across the economy and lasts longer than a few months. They claim that the U.S. was not in a recession in the summer of ’22.

However, a recession might happen shortly. The Federal Reserve is committed to raising interest rates until the sky-high inflation levels decline. That might result in a recession and the economy contracting.

How the U.S. Recession Impacts the I.T. Industry- India Might Benefit from a Modest U.S. Recession

TCS, Infosys, Wipro, and other Indian I.T. companies are ambling with alertness after a couple of years of record profits and staggering salary increases as wages and a potential downturn in demand add to margin problems. For Indian I.T. majors, a U.S. economic downturn might not be all that terrible. According to experts, attrition and spiking salary expenses may benefit from a prospective slowdown.

These I.T. companies are already under pressure, and that tension is growing as fears of a recession in the U.S. and Europe gain steam. These I.T. companies’ FY23 earnings guidance reflects the pressure from the U.S. and Europe’s economic slowdown.

According to a Motilal Oswal analysis, the U.S. and Europe provide most of the revenue for Indian I.T. companies. Both regions are dealing with impending macro challenges, including one of the highest inflation rates and a slowdown in GDP growth.

The Indian I.T. industry is expected to proceed slowly for two years following the recording 19% revenue growth in FY22, as per the Crisil analysis. According to the report, due to anticipated tightening in corporate capital expenditure due to inflationary headwinds, revenue growth is predicted to decrease to 12-13% this fiscal and 9-10% in the next.

According to Dhananjay Sinha, chief economist and head of strategy research at J.M. Financial, a downturn in the U.S. and E.U. economies might also mark the turning point for a reduction in salary increases and attrition rates.

Research companies predict that the margins will remain under considerable pressure as long as attrition levels remain high. Infosys is the company that has been most negatively impacted, with an attrition rate of 28.4% in Q1 FY23. According to a report by ICICI Securities, the corporations had decreased their margin guidance at the beginning of FY23. Still, the ongoing pressure from high attrition rates projects that margins may slip close to the lower end of guidance.

By the December quarter of this year, wage increases and attrition rates may begin to decline, according to Sinha. According to him, cooling off pay across the I.T. sector might resolve the attrition problem for I.T. companies. I.T. leaders may have fewer exits because startups are also experiencing financial shortages.

According to Sinha, Infosys might be the market leader. This is because its decision to reduce variable compensation to 70% demonstrates its willingness to manage expenses. According to media reports, Wipro postponed payouts for some employee categories, indicating that businesses are starting to feel the squeeze. On the other hand, TCS introduced 100% variable paydays after Infosys.

The top three cloud platforms in the world, Amazon Web Services, Google Cloud and Microsoft Azure, reported a 7% reduction in sales. This indicates that a downturn in the U.S. economy is already impacting Big Tech revenues. According to media sources, this might directly affect TCS, Infosys, and Wipro. It could damage the revenues of major IT businesses by up to 33%. According to Motilal Oswal’s research, a weaker macro environment could result in lower I.T. spending and slower growth for Indian I.T. companies.