IT-Related Service Providers - Further Drop in Sentiment Indicator

The ZEW-IDI, sentiment indicator for the economic sector IT-related service providers, has dropped in the first quarter 2005 for the second quarter in a row and now rates at 55.4 points. This value of the indicator, which is being compiled since the third quarter of 2003, corresponds with the, as of yet, historic low recorded in the first quarter 2004.

For this relatively clear drawback especially the dampened business expectations sign responsible, as was the case already in the fourth quarter 2004. The partial indicator comprising the business expectations for the second quarter 2005 rates at 57.2 points and thus 4.9 points lower than in the previous quarter. In the first quarter 2005, the assessment of the current business situation clearly points downward as well. The partial indicator of the current business situation, as compared to the previous quarter, declines by 2.4 points to a value of 53.7 points.

This is the result of a business survey among German IT-related service providers that the Centre for European Economic Research (ZEW), Mannheim, and the credit reference agency Creditreform, Neuss, conducted in March and April 2005. About 1,000 firms participated in this survey. The sector of the IT-related service providers comprises the Information and Communication Technology (ICT) service providers (firms in the branches of computer service and leasing, ICT-specialised trade as well as telecommunication services) and knowledge intensive service providers (firms in the branches of tax consultancy and accounting, management consultancy, architecture, technical consultancy and planning, research and development as well as advertising).

In the branches tax consultancy and accounting, research and development, as well as management consultancy the proportion of firms with a positive turnover development in the first quarter 2005 is highest. The development of earnings as well is positive on balance. Accordingly, the firms from these three branches share an optimistic outlook on the second quarter 2005. Both the demand expectations as well as turnover expectations are distinctly positive on balance.

As the fourth of the nine branches from the economic sector, only the advertising agencies recorded a positive balance in turnover development. Remarkable in this branch are especially the optimistic expectations for the second quarter 2005. Almost half of the advertisement agencies anticipate increasing demand and a positive earnings development.

In the first quarter 2005 the turnover development has worsened in particular for the architects, as well as the computer service providers and lessees. While, due to a positive development in demand, the computer service providers and lessees on balance expect a positive earnings situation, it is the architects that most frequently report of decreasing demand and earnings. The architects are on balance, however, optimistic that their turnover and earnings situation will recover in the second quarter 2005. The computer service providers and lessees, on the other hand, on balance expect turnover losses in the second quarter 2005.

The employment situation in the economic sector IT-related service providers is rather unfavourable. In particular the advertisement agencies, despite their positive assessment regarding the development of business in the first quarter 2005, stand out for their high share of firms that have been releasing staff. About 60 percent of the advertisement agencies have cut staff in the first quarter 2005. This share is higher only in the architecture branch, with more than 75 percent of firms downsizing. A positive balance of employment development in the first quarter is only indicated in the management consultancy, as well as research and development branches. Of the management consultancies about half the firms have hired staff, of the research and development firms about one third.Besides the management consultancies, only the tax consultancies and accounting firms expect that on balance they will add to their staff in the second quarter 2005.

The firms in the eastern German "Länder" assess their economic situation in the first quarter of 2005 as much worse compared to their western German competitors. In eastern Germany the share of firms that report of a negative development in turnover, earnings, and demand clearly outweighs the share of firms that experienced a positive business development in the first quarter 2005. Regarding the expectations among eastern German firms for the second quarter 2005, the share of pessimists outweighs the share of optimists as well. The expectations of the western German IT-related service providers for the second quarter 2005 are, however, tentatively optimistic. Regarding each turnover, earnings, and demand, the share of firms expecting an improvement in the second quarter outweighs by about 15 percentage points the share of firms expecting a further decline.

Information on the ZEW Indicator of IT-related service providers (ZEW-IDI)

The ZEW-IDI is calculated on the basis of the four following components: current turnover and demand, as well as expected turnover and expected demand (each compared to the preceding respectively succeeding quarter.) All of them are weighted equally in the calculation. Current turnover and demand form a partial indicator which reflects the business situation. Turnover expectations and demand expectations form a partial indicator which reflects business expectations. The geometric mean of the business situation and the business expectations equals the value of the ZEW-IDI. The sentiment indicator can take on values from 0 to100. Values exceeding 50 hint at an improvement of the business situation compared to the previous quarter, values less than 50 hint at a worsening compared to the previous quarter.

Remark on projection

To generate a representative analysis, the ZEW is projecting the answers of the firms participating in the survey with their shares of total turnover realized in the sector of the German IT related service providers.

Contact

Jörg Ohnemus, Phone: +49 (0)621 1235-354, E-mail: ohnemus@zew.de