IT spending remains on track with expectations

FRAMINGHAM, USA: IT spending remained broadly in line with prior expectations during the first quarter of 2008, confirming a deceleration in some areas of demand in the United States.

IDC believes that the stagnant economy is still likely to drive overall IT spending growth down to around 4 percent in the US this year, compared to last year's growth of 6 percent.

International demand continues to mitigate the impact of the US slowdown to some degree, particularly in relation to favorable currency trends which have buoyed the reported earnings of US-based vendors. Some tentative signs of weakening demand and indicators have emerged in Europe and Asia, however, and there remains an elevated risk of further downside patterns in the next three quarters. Worldwide IT spending is expected to increase by 5.7 percent this year on a constant currency basis, down from last year's 7.2 percent.

The first quarter results have not disrupted IDC's prior view on US IT spending this year, with signs of softening demand in the PC market confirming that a broad-based but so far contained slowdown is in effect. IDC reaffirms the view, which calls for hardware market growth in the US of less than 2 percent this year, while software spending will increase by 7 percent and IT services by 5 percent.

Strongest growth continues to come from back-end software (system infrastructure and application development tools), network equipment, and mobile devices. However, downside risks relating to macroeconomic weakness in the US are expected to persist throughout the remainder of 2008.

"In a downside scenario, we could be at the beginning of a classic IT spending slowdown," said Stephen Minton, vice president of Worldwide IT Markets at IDC. "In every previous IT recession, the first sign of weakness has shown up in a softening of PC shipments. This has then transmitted to other hardware sectors within one quarter, to software license sales within half a year, and to the IT services sector if the recession persists for more than three quarters. Until we deviate from that course, we must closely monitor all other sectors of the IT and telecom industries for indicators of a further round of spending cuts. While this downturn will not resemble 2001 in terms of scale, it could yet be similar in terms of timing."

International impact of US slowdown

International markets are also feeling the impact of the US slowdown, to varying degrees. IDC has lowered its forecast for Western Europe to 4.1 percent growth in IT spending this year, and for Asia/Pacific to 5.4 percent.

Manufacturing exporters and financial services firms are likely to be the hardest hit, and this will be reflected in adjustments to their short-term IT investment plans. Booming growth has continued in resource-based economies such as Russia and the Middle East, however, and IT spending in those regions is expected to continue its double-digit rate of expansion this year.

"The global economy is still faced with a variety of risk factors," said Anna Toncheva, economist at IDC. "Intensifying financial instability, inflation pressures, and global imbalances have lead to increased synchronization of the business cycles between the US and the rest of the world over the first quarter of 2008. When business cycles are closely tied together, macroeconomic shocks tend to spread faster from one area to another. And though the current housing and financial crisis in the US seems comparable only to the mildest cases in world history, the compression on global economic activity will probably linger over the course of the next six to seven quarters and will inevitably discourage investment plans."