IDC: IT spending will rebound, unless war drags on

Unless the war in Iraq drags on, global IT spending will rebound this year, growing 2.3% over last year, market researcher IDC said Thursday, in a downward revision of a previous forecast that saw growth of 3.7%. The revised forecast, offered in the company’s latest Worldwide Black Book analysis, was made because of the war and uncertainty about the stability of some economic regions.

Assuming a “relatively short war” and economic stability, IDC predicts global IT spending this year will reach $852 billion. Broken down by region, European IT spending growth will lead with 2%, with a 1.5% increase in the U.S. and a 1.4% decline in Japan, which continues to suffer ongoing economic problems including an unemployment rate that has risen to 5%, the highest in a decade.

Spending growth will be spurred by software, with a predicted increase of 4.5% worldwide. Hardware, however, will continue to slump with an 0.5% decline, IDC analysts said, reviewing the Black Book during a conference call. Spending on services will also increase with 3.7% growth seen by the Framingham, Mass., market researcher, which is a subsidiary of International Data Group, the parent company of IDG News Service and Network World.

Overall growth will continue next year, with an increase of 4% to 6%, and hit 6% to 7% in 2005, analysts said, with the global IT market hitting $1 trillion in revenue by 2006.

Low profits and the business climate are the two top issues that cause companies to cut back on IT spending, but “there is a certain amount of pent-up demand from the last couple of years that will gradually start to overcome these inhibitors,” said Stephen Minton, program director for IDC worldwide IT markets. That will amount to a gradual shift toward IT spending increases, he said.

When the war ends, there will be an upturn overall in the U.S. economy at least, with other regions also poised to see improvements, said Kevin White, research manager for IT markets and strategies, who also forecast a stock market rally as part of the rosier picture. Japan will continue to have issues related to deflation and its overall economic woes, and Western Europe ought not expect the same amount of economic stimulus that will be evidenced in the U.S.

“At least in the U.S., I think there are some positive drivers in place and ultimately a U.S. recovery will help other regions recover as well,” Minton said.

IDC is keen about an increase in network equipment purchases, driven partly by widespread broadband adoption and data network growth, and it predicts that the converged handheld market will provide a key boost to hardware overall, which will have a tougher time recovering because of “fierce price competition and continued capital expenditure declines from telecom operators,” IDC said.

Outsourcing will be a top growth segment, even though cost-cutting last year disrupted that market, analysts said, forecasting stronger price stability in services contracts this year and next.

Mobility, including wireless services and devices, will take hold as a global trend. For instance, in Western Europe, that push will lead to a 91% increase in spending in that area next year, said Vicky Hawksworth, a senior research analyst in the EMEA (Europe, Middle East, Africa) IT markets center. Converged devices are “the driving force behind this growth,” she said. Such devices combine, for instance, a mobile telephone and a handheld computer.

However, short-term gain in the mobile segment alone won’t translate into overall IT spending health in that region. “In the medium to long-term, the outlook is certainly positive for the European markets, but in the short term, the prospects for any significant rebound remain limited,” Hawksworth said.

In the Asia-Pacific region, the outlook also remains mixed in what IDC calls “a tale of two regions,” Minton said. If Japan is taken out of the mix, the forecast looks better, particularly relative to China, which is forecast to experience a 7% to 8% growth in gross domestic product next year. Insurance and banking companies are moving into China and the telecommunications sector there also shows promise for growth.

Elsewhere in the Asia-Pacific region, Australia will continue to be strong and Southeast Asian countries will stay on the road to recovery, IDC predicts.

Emerging markets still have “pretty positive growth expectations over the next few years,” assuming they remain stable, he said. But the economic abyss that Argentina fell into could happen elsewhere, so any forecast for emerging markets assumes stability in countries that might better be viewed as volatile. The Middle East also remains a big question mark because of the effect a prolonged war would have there.

“If the war goes on longer, that region will take a big hit” to both its overall economy and in IT spending, Minton said.

Yet, based on an assumption the war will not be prolonged, IDC forecasts that after it ends there will be a gradual recovery for corporate profits and business confidence will improve, which will mean a global increase in IT spending.