Is Big Tech the canary in the economic coal mine?

Tech firms are sending us worrying signals about the state of the global economy. A string of big names, including some of Silicon Valley’s most powerful entities, have announced lay-offs or hiring freezes in response to the souring economic climate.

In a memo to staff last week, Amazon announced a pause on corporate hires while Apple, which had slowed hiring in recent months, moved, according to insiders, to a near total freeze on recruitment. Facebook and Google have implemented similar hiring pauses.

The headlines here initially centred on payments company Stripe’s decision to cut 14 per cent of its staff worldwide. In an email to staff, chief executive Patrick Collison said while the business was well positioned to weather harsh conditions, the company had over-hired “for the world we’re in”. “We think that 2022 represents the beginning of a different economic climate,” he said.

However, the Stripe story was quickly overtaken by the news that Twitter’s new owner Elon Musk had taken a veritable knife and scissors to the business with up to 3,700 staff worldwide likely to be shown the door under his new drastic cost-cutting plan, including 50 per cent of the company’s 500 Irish-based staff.

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[ Breda O’Brien: The online world was broken long before Elon Musk ]

One insider described the situation inside the Irish arm of the business as “carnage”, suggesting the lay-offs were “random and indiscriminate”. Staff found their workplace access had been cut off on Friday morning as the new owner began his mass cull of employees.

Twitter’s travails are of course more company-specific than sector-specific: the business has perennially struggled to generate earnings that befit its global standing. Musk claims the company is losing $4 million (€4 million) a day.

Before this year, tech companies had been at the apex of global growth and a decade-long bull run on stock markets, one that stretches back to 2009 and the financial crisis.

The severity of the incoming storm will depend on whether central banks can engineer a soft landing. In other words, can they bring inflation under control without raising interest rates too high and triggering a more protracted downturn?

Even through the winnowing-out period of the pandemic, these firms produced mammoth earnings on the back of increased levels of digitisation. Ireland’s tax coffers are proof of this.

The boom in tech is undeniably a product of fundamental changes to the way we live and consume goods and services. Netflix and Amazon now seem integral to household consumption patterns.

But company valuations have also been supercharged by other more temporary factors such as the pandemic, which led to an increased incidence of remote working and an increased reliance on ecommerce.

Benign monetary conditions have also played a role. Tech valuations are – in many instances – based on potential future earnings. Low interest rates make these earnings a lot more valuable, the converse is true when they are rising.

Hence the cycle of rate hikes being implemented by US Federal Reserve and the European Central Bank (ECB) have taken the fizz out of stock markets. The tech-heavy Nasdaq in the US is down by more than 30 per cent this year as investors pivot into companies and businesses that generate profits and pay dividends now. Contrast that with the 10.9 per cent drop in the Dow Jones Industrial Average, or the 14.5 per cent fall in the pan European Stoxx 600.

Stock valuations are one thing, recruitment freezes and staff lay-offs are another. They reflect a fall-off in demand for services related – most probably – to the biting impact of inflation. Rent, heating and food are non-negotiable for most households. Digital subscriptions, Amazon purchases, newer phone models can be pared back.

[ Are Twitter job cuts a sign of trouble ahead for the Irish economy? ]

Collison referred to energy shocks, higher interest rates, inflation, declining investments and global recession fears as reasons why the company is now “building differently for leaner times”. The reversal in tech appears to be both a product of these overvaluations and investment-heavy balance sheets and a signal that a wider global downturn is upon us.

The severity of the incoming storm will depend on whether central banks can engineer a soft landing. In other words, can they bring inflation under control without raising interest rates too high and triggering a more protracted downturn? That’s perhaps the single biggest economic question in the world right now.

On Thursday, Bank of England governor Andrew Bailey tried to push back on market expectations that UK interest rates might rise as high as 5.25 per cent by the middle of next year, insisting markets were pricing in too many rate rises. Central banks, particularly the ECB, have, however, been caught out by the rapid surge in inflation and there’s now a credibility gap.

Bailey’s ameliorating effort was also overshadowed by the Bank of England’s extraordinary announcement that the UK economy is facing into the longest recession since records began in the 1920s, one that will last into the first half of 2024 and see unemployment double.

The absence of a marked downturn in employment – up to this point – has been one of the noticeable features of the current downturn. Normally we associate recessions with mass lay-offs. The squeeze on big tech appears to be the beginning of a new, less employment-friendly phase of the crisis.