German IT-Related Service Providers: Upward Trend Contained

The ZEW-IDI, sentiment indicator for the German IT-related service providers, rates with 59.0 points in the fourth quarter of 2004 clearly below the previous quarter's value of 62.6 points.

This may for the most part be attributed to the clear drawback of the partial indicator which reflects the firms' business expectations for the first quarter of 2005. The indicator value regarding the assessment of the present economic situation has however only slightly decreased. After continuous increases of the ZEW-IDI over the past two quarters, the values for the fourth quarter of 2004 reflect dampened growth prospects for the German economy as a whole. The balance of positive and negative turnover development in the fourth quarter is only at a slight plus. This does not match the previous quarter's expectations by the IT-related service providers, when on balance still more than 36 percent of the firms were anticipating increasing turnovers for the fourth quarter of 2004.

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 November and December 2004. About 1,000 firms participated in this survey. The sector of the IT-related service providers is comprised of 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).

While firms in western Germany on balance report of stagnating turnover development in the fourth quarter compared to the previous quarter, the turnover of firms in eastern Germany has moderately increased. Due to the markedly decelerated drawback in prices, the earnings situation of firms in eastern Germany has improved despite a decrease in demand compared to the previous quarter. In the fourth quarter only 18.7 percent of eastern German firms report on balance of a worsened earnings situation. In western Germany on balance 15.5 percent of firms report of an improved earnings situation. Regarding the first quarter of 2005, still a majority of firms anticipates an increase in demand rather than a decrease, despite lowered business expectations. Turnover and earnings are on balance also expected to increase for the first quarter of 2005.

Employment figures among the IT-related service providers continue to remain volatile. Expectations in the third quarter of 2004 to retain the number of employees have not been met. On balance more than 23 percent of firms release staff. In eastern Germany the number of firms releasing staff exceeds the number of firms hiring new staff by 14.6 percent. In western Germany this balance amounts to nearly 24 percent of firms. Thus, for the first time since the third quarter of 2003, more western than eastern German firms report of a decrease in staff. Expectations of eastern German service providers regarding staff changes in the first quarter of 2005 are however more pessimistic than those reported by western German firms.

Just as in the third quarter of 2004 the ratio of firms reporting an increase in turnover compared to the previous quarter is highest among tax consultants and accountants as well as research and development firms. The proportion of architects with a decrease in turnover is striking at 71 percent. Thus architects had to absorb the greatest decline in turnover of all branches. Among the factors influencing this decline is the decrease in demand in the main construction trade. In five of the nine branches overall, the ratio of firms reporting a decrease in turnover compared to the previous quarter exceeds that of firms with an increase in turnover.

Regarding the demand for their services most branches are confident for the year 2005. Solely the architects and technical consulting firms expect a decrease in demand in the first quarter of 2005. Such positive demand expectations will however, according to the firms' expectations, only afford additional staff for tax consultants and accountants, in the ICT-specialised trade and for the business consultants.

Additional 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