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Product Strategy

What impact will inflation have on salaries and costs in the IT sector?

Frédéric Lasnier
Frédéric Lasnier
Chief Executive Officer

One thing is certain: all over the world, salaries in the digital professions did not wait for inflation to accelerate before starting their own phenomenal rise.

impact of inflation

Catching up with offshore and nearshore zones? Not really…

Keep in mind the ‘absolute value effect’. Consider an American employee who earns $150,000, and whose salary increases by 10%; the increase would be $15,000. Then consider the salary of a Filipino who earns $25,000, and whose salary increases by 15% – an increase of “only” $3,750. Once it is incorporated into the cost of digital development, US inflation has a much greater impact.

The cost ratio between the two countries was 6. If it has indeed increased to 5.73 – not a huge difference – it is nevertheless likely that the incentive to work offshore has also progressed in the meantime, helping to reduce costs.

A race for the best talents in the world… fueled by remote work – and the US

There is no doubt that American companies – always better financed than the others and in search of the same top talent – continue to fan the flames. A remote programmer in Europe who earned between 4 and 5 thousand euros per month before the pandemic can easily go freelance for an American company for 10 to 12 thousand USD per month … with the possibility of share options. The gaps in income, working style, financial participation, and culture have become enormous, but also accessible to anyone with digital technical competence.

At the same time, there is good news for European workers. Many are exposed to the euro currency, either because their salary is calculated in euros or because their local currency is pegged to the euro. But it is precisely the fall of the euro against the dollar that has made them relatively attractive compared to their counterparts in the US, Canada, and Latin America.

Some countries have been less exposed than others to inflation: Mexico, Vietnam, and China, for example. Overheating wages in the United Kingdom are also starting to slow down, while they are sharply accelerating in Germany and France, and stabilizing at high levels in Central and Eastern Europe. Everywhere, inflationary numbers are in double digits.

Certainly the war between Russia and Ukraine has affected the availability of developers with major skills from these two countries, fueling the inflationary spiral.

Is there a digital slowdown? Well, yes – but it’s a little later than expected.

This is actually one of the more difficult questions to answer. According to observations made by Pentalog HR on freelancing and recruitment in Europe, the market remains in very high demand. But that demand saw an inflection point over the summer of 2022 when compared to the madness of Q4/2021 and Q1/2022. The reduction in the venture capital market created a soft spot in the financing phase for many startups, particularly in the later stages.

On the other hand, to date, with the exception of retail, the digital transformation projects of large companies have been minimally disrupted. For example, not only is the automotive market still resisting, but electrification and digitalization must be carried out at full speed. This sector, sacrificed in 2020, has only become more buoyant in 2022.

It is also possible that tech workers in retail and FinTech in the UK will be encouraged to change jobs or industries, but they may find less favorable conditions there. In the US, France, and Germany, we are not at British levels, but both of these sectors are also experiencing a noticeable slowdown.

Cryptocalypse?

The gigantic and incredible scandal in FTX (Futures Exchange) is contaminating the entire cryptocurrency sector, hitting FinTech on the rebound. In a market already criticized for its lack of transparency and its “Wild West” approach, embezzlement by the founder of FTX on the one hand, and on the other hand, Iranian funds passing through Binance, billions of dollars going up in smoke, and the panic of investors throughout the ecosystem. In other words, web3 is going through a really difficult phase! Announcements of layoffs by the big players in Silicon Valley are symbolic of this brutal handbraking. However, these companies have seen similar problems in the past, and in this field, turns are as sharp one way as another. We have announced the end of this or that a thousand times, but business can be scathing.

In conclusion, we can probably expect a significant slowdown in the digital engine for the economy in the fourth quarter, as shown by the figures for e-commerce, for example (at an all-time low) or those for startup financing. For Gartner and Forrester, after record growth of 10.2% in 2021 and the drastic slowdown in the pace of growth in 2022 to 0.8%, we are once again talking about 5% or more for 2023. Maybe a simple effect of inflation – hard to be sure – but the trend is implied by several indicators:

  • Software is up 11.3%, after an 8% increase in 2022
  • IT services are also increasing
  • The Cloud (IaaS is up 20.7%!)

These forecasts seem to corroborate our own observations: economic trends, though difficult, have not to date caused the massive recession expected for 2022. Companies continue to believe in a digital future, and they continue to look to digital for the solution to get out of the crisis.

Which, of course, is reassuring for our industry!


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