Return to Growth Is Here, but There’s a Catch

Artificial intelligence and other catalysts are pushing the IT market back to growth mode, but other factors could impede increases in sales activity.

By Larry Walsh

Good times in the tech market and channel are returning slowly. Vendors, distributors, and solution providers are beginning to see sales tick up, and demand for new products and services increase. The trend lines are strong enough to compel market analyst firm IDC to revise its global growth forecast from 4.1% to 8%.

Even when accounting for regional differences, IDC says it’s confident that growth will be more or less 8% in most developed markets and in the low double digits in emerging markets. Despite a sluggish first quarter, Gartner set the mark at 6.3% growth this year. And this is just the beginning of the ramp. IDC says global IT spending could hit double digits in 2025 and 2026.

IDC revised its forecast up simply because spending is increasing just when conservative observers — including Channelnomics — thought it might.

AI as a Catalyst
Artificial intelligence is surging. IDC raised its general AI spending forecast from $150 billion by 2027 to $542 billion. A significant jump is attributable to the rapidly growing demand for this transformative technology.

But AI is also a catalyst for other technologies. Hardware manufacturers anticipate AI workloads will be too expensive to run in hyperscalers’ cloud infrastructure, so they’ll need to run them in local data centers or co-located hybrid environments. Either way, AI is already starting to drive data center hardware sales. Earnings reports by Dell, Lenovo, and HPE prove this.

But it’s not just AI that’s lifting sales. HP surprised many with increased PC sales, with its second-quarter earnings coming in higher than expected. HP, Dell, and Lenovo are releasing new PCs to give users a better generative AI experience. But the real driver is the end of support for Windows 10 and the aging of all the devices bought during the pandemic compelling a refresh.

And this story is being told across the channel. Vendor channel chiefs and distributors are cautiously optimistic that the second quarter is the beginning of a return to real growth. Instead of making numbers based on deep discounting and increased prices, they’ll be looking at sales returning to a point where they can invest in their go-to-market strategies and partner programs.

Putting Growth in Perspective
Now, a little bit of perspective. This upward trajectory in sales was always expected. Despite the rosy forecasts by analyst firms about healthy growth in 2022 and 2023, the numbers never materialized, and Channelnomics expected that. But the return to growth sometime in 2024 was always in the cards.

Since the end of 2022, Channelnomics has consistently predicted that the IT market and channel would be sluggish — at best — in many product and service categories. Even if some segments performed well, most would see longer sales cycles, fewer transactions, and profit pressure as customers remained cautious in spending due to inflation and high interest rates.

Market demand is one thing, but the ability to spend is another. The European Central Bank last week lowered interest rates for the first time in five years as inflation pressures eased. The Bank of England is expected to lower its rates in August. And the U.S. Federal Reserve will probably lower rates in September before the November elections. The consensus is that interest rates won’t return to near-zero, where they’ve been over the past decade. Still, they’ll become more palatable to businesses that must finance their investments.

Why is the 8% growth number now published by IDC significant? Simple. Even if the second quarter was better than expected, the first half was sluggish. To make up for the first half, the second half has to roar to higher-than-expected levels to reach the full-year target.

The return to growth comes with caveats that will impact how much, if any, will happen in the second half.

• Inflation Variable: Inflation rates in much of the developed world are approaching target levels, but the rates for respective commodities are variable. If overall interest rates spike, central banks may hold back on interest rate cuts, constraining the money supply and business spending.
• AI Distraction: AI spending will remain strong regardless of what happens in other product categories. And that’s the potential problem. IT budgets haven’t returned to normal levels, which means AI may siphon off spending that would’ve otherwise gone to other product and systems investments.
• AI Impediments: AI is the growth catalyst across multiple categories. However, businesses face several challenges in their AI adoption — insufficient infrastructure, high energy requirements and costs, lack of viable use cases, and poor data quality. These impediments could delay investments even if customers want to spend. (Check out the Channelnomics blog “7 Artificial Intelligence Impediments, Opportunities for the Channel.“)
• Local and Geopolitics: The U.S. presidential election, the wars in Ukraine and Gaza, China’s belligerent posture toward Taiwan, and the global shift to more conservative and authoritarian governments could disrupt normal business operations and dampen growth.
• Protectionist Policies: Due to political issues, many governments are imposing trade protections and investing in domestic capacity. Unfortunately, tariffs are easier to implement than building local capacity. If countries continue to raise tariffs to protect their local industries, it could spark trade wars that increase costs and hamper growth.
• Talent Shortages: New technologies require people trained and qualified to create, operate, and maintain systems. Currently, the talent pool — particularly for AI — is shallow. ServiceNow, for instance, needs to train more than 1 million people on its AI technologies by 2027. And that’s just one vendor. The channel will help augment capacity through aggregated services, but it may not be enough to keep up with demand, which could slow adoption.

Revised Expectations
Channelnomics expects the second half of 2024 to be better for vendors and partners, but the full-year results will still be flat relative to 2023. However, a more robust second half will set the stage for healthy growth in 2025 and robust growth in 2026. The market has no other direction to move but up. And while there are factors that could curtail or derail growth, they’re likely transient — meaning they’ll delay but not stall growth.

The channel, however, may have to wait for the benefits of this growth. Channel chiefs tell Channelnomics that they haven’t been able to invest in initiatives because of the depressed sales in 2023 and early 2024. Channelnomics research finds that most vendors have been cutting channel spending. Channelnomics doesn’t anticipate that channel budgets will increase this year, or in 2025, as vendor executive teams wait to see if the growth trends are sustainable before making investments in expansion.

Channelnomics believes vendors will return to investing in their channel programs in mid-2025 and 2026 as their ability to leverage existing resources to meet market demand is outstripped by their existing internal and ecosystem capacity.

There’s much to look forward to in the next 36 months. Growth is inevitable.

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