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'Tech Slowdown will last till Q3 2009'

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CIOL Bureau
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New York, USA: Forrester Research, an independent research firm, has revised its 2009 US IT spending forecast and is now projecting 1.6-percent annual growth in US IT spending for next year, though stating the US IT market outlook is down but not as bad as the 2001-02 tech depression.

The latest Forrester report data highlights that the IT consulting and systems integration services will hit the wall in 2009 and that IT outsourcing growth will remain moderate in 2009 and 2010. This US tech market forecast now assumes that the decline in US real GDP in Q3 2008 will accelerate in Q4 2008 and the first half of 2009 before a weak recovery starts in the second half.

The Forrester report – “US IT Market Outlook: Q4 2008” is based on analysis of US Department of Commerce data and the financial reports of 49 IT vendors, and it details the current IT spending across computer hardware, software, communications equipment, and services.

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According to the author of the report, Andrew Bartels (VP, Forrester Research), “The question for the US tech market is no longer whether the US economy is in recession - instead, it is how long and deep the recession will be and how much damage will it do to the tech sector.

Forrester is still a relative optimist, believing that the recession will last into mid-2009, with declines in real GDP of as much as 3.6 percent on a quarterly basis. This kind of decline in the economy will pull growth in US business and government purchases of IT goods and services down to 1.6 percent in 2009, from 4.1 percent growth in 2008. The weakening of the US tech market was already evident in the Q3 2008 data, which showed US revenues of large vendors down by 2 percent.”

Highlights of the report:

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IT consulting and systems integration services will hit the wall in 2009. Throughout the first half of 2008, the US market for IT consulting and systems integration services had been shaking off the dampening effects of a slowing US economy and had posted good growth of 8 percent or so per quarter.

However, as we had predicted in our last report, demand dropped in Q3 2008 and will continue to weaken in Q4 2008, bringing full year growth to 4.1 percent for 2008 and 2.2 percent for 2009. Demand for help with building service-oriented architectures, squeezing value from past IT investments, helping with mergers and acquisitions, and improving process efficiency will keep growth from slipping below 2 percent in 2009, and lead to stronger growth of 7.9 percent in 2010.

IT outsourcing growth will remain moderate in 2009 and 2010. IT outsourcing will get a small lift from an economic slowdown in 2008 as companies turn to vendors that can help cut IT costs. However, growth in IT outsourcing revenues will remain moderate due to trends toward use of lower-cost offshore resources, smaller-scale outsourcing deals, and the nine- to 15-month lag from the decision to outsource, through the selection of a vendor and negotiation of a contract, to the actual transition to the outsourcer's control. One area of growth is likely to be demand for managed network services offerings, which vendors are pushing and clients are increasingly adopting.

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Which Industries Will Keep Buying IT Goods And Services, And Which Won't ?

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Factoring in both the recession and the forces of recovery, we expect that financial services, consumer durables, construction and housing, retail, and industrial products (including autos) will be the industries most likely to cut back their IT purchases in 2008 and 2009.

Weakest IT buying industries

The financial services industry will cut their IT purchases by 3 percent in 2008 and by 4 percent in 2009, and the construction industry cut back by 2 percent in 2008 and 2009. The retail industry will have no growth in IT purchases in 2009, and IT buying by industrial manufacturing will slow to 1 percent in 2009. State and local government IT spending will also be weak.

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Industries with mixed IT buying prospects. High-tech products, wholesale trade, media and entertainment, transportation and logistics, and some professional services like consulting and advertising services will see some slowing of growth in either 2008 or 2009, with growth generally in the range of 2 to 3 percent.

Industries most likely to continue strong IT purchases. The industries that present the best opportunities for IT vendors in 2009 include the federal government, primary production, consumer products and pharmaceuticals, chemicals and oil and gas, public services like healthcare and education, insurance, utilities, telecom, and most professional services, all of which will not be impacted much by the recession. As a result, their IT budgets are likely to grow by 4 to 8 percent in 2009.

The report states that this recession will not be a replay of the 2001 to 2002 downturn, when tech vendors saw big drops in their revenues. Says Bartels, “This time, computer equipment vendors will see declines of 5 to 10 percent in US revenues on a quarterly basis, not the 20 percent to 25 percent drops of the early 2000s.

Sellers of communications equipment, software, and IT consulting and outsourcing services will see one or two quarters of declining revenues, but on average will still grow modestly in 2009. So, IT vendors need to have a plan that mirrors what will happen in their sector.”