Digital Appetite and Smaller Brands Fuel Ad Growth in New Forecast

Global advertising is nearing its strongest showing since 2010, according to a new forecast from ad-buying group Magna Global. Spending is on track to increase 7.2% in 2018 to $552 billion, the company said, raising its growth forecast for the year from an earlier projection of 6.4%. The company is also increasing its expectations for 2019 ad spending to 4.7% in growth from 4%.

The spending is fueling breakneck revenue expansion for digital ad giants such as Google and Facebook , but less so for Madison Avenue, where many of the largest advertisers and their agencies are growing at a slower clip. The gap is an indication that a new batch of brands are starting to spend more money on advertising are working differently, if at all, with major ad agencies.

Stripping out spending from 2018’s trifecta of large ad events—the Winter Olympics, the midterm elections in the U.S. and the World Cup—the company expects a 6.1% increase in global ad spending this year, another upward revision of its predictions.

Growth in digital advertising drove a huge portion of the increases this year. Digital ad spending will grow by 17% in 2018 to $251 billion, Magna said, lifting that forecast by 1.5%. Growth will slow next year to 13.3%, according to Magna, though that, too, represents an improved outlook from the company.

Despite the upswing, there is little celebration on Madison Avenue. Revenue at the four largest ad holding companies—WPP,Publicis Groupe , Omnicom Group and Interpublic Group of Co s.—is likely to grow by weighted averages of only around 2% in 2018 and 3% in 2019, according to Pivotal Research Group Senior Analyst Brian Wieser.

“We think much of the growth that we are seeing in the paid-media marketplace is coming from marketers who do not necessarily use large agency networks (i.e. e-commerce companies or app developers) for most of their spending,” said Mr. Wieser in a recent note to investors.

The ad-holding companies get a disproportionate amount of business from the largest marketers, many of which aren’t increasing their spending as fast as smaller brands, he added in an interview.

Agencies’ performance also isn’t necessarily tied as closely to ad sales as it once was, Mr. Wieser said. For example, in the past, they were more often paid commissions based on how much an advertiser would spend with a TV network or print publisher. Now, they are doing more work in strategy and consulting and creating less lucrative ads for digital media, he said.

The difference between ad spending and ad-holding company growth is a result of more marketers relying on internal talent, media owners, consultancies and others, said Joanne Davis, an agency search consultant for marketers.

Smaller advertisers are also fueling growth on digital platforms such as Google and Facebook, said Vincent Létang, executive VP of global market intelligence at Magna, which is part of Interpublic. Big national brands only account for around 20% to 25% of total spending on the platforms, he said.

Magna increased its original digital ad growth forecast after tracking a continuing surge in spending online, despite pullback from some large advertisers and concerns around the safety of the content online. “If some of them did slow down their digital diversification, they didn’t make a dent into the overall growth rates of the digital formats in advertising,” Mr. Létang said.

While U.S. ad spending is expected to rise 7.5% in 2018, to $208 billion, Magna predicts a “moderate slowdown” in U.S. ad growth to 2.4% in 2019, said Mr. Létang. (That is an increase from the company’s previous expectations of 2%.)

Stripping out spending on cyclical events such as the Olympics, U.S. ad spending will rise 4.5% next year, close to the average over the last eight years, Magna said.

A more tangible deceleration is expected to come in 2020, when digital media “reaches maturity” and the U.S. economy is likely to slow, according to Mr. Létang, citing macroeconomists surveyed by the Federal Reserve Bank of Philadelphia.

There also is growing concern that ad revenue could be hampered next year by cutbacks in the automotive industry, one of the biggest categories of ad spenders, and uncertainties in the economy.

General Motors last week announced plans to eliminate up to 14,800 jobs in the U.S. and Canada and halt production at several North American factories. Meanwhile, Ford recently ended U.S. production of the Focus and scrapped plans to import it to the U.S. from China.

In a separate forecast released almost simultaneously, WPP’s GroupM downgraded its expectations because of challenges in the automotive and packaged-goods industries. GroupM now predicts global ad-spending growth of 3.6% for 2019, down from its earlier prediction of 3.9%.

“GroupM’s still strong but slightly fraying 2018 view ties to macro questions: tighter money, China’s slowing growth, and the potential for pricey trade wars,” said Adam Smith, futures director at GroupM, in the report. “Real interest rates are edging up globally, but serious potential problems remain limited to a fragile five—Argentina, South Africa, Brazil, Turkey and Venezuela.”