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How will the European sovereign debt crisis impact IT spending?

by Richard Gordon  |  June 30, 2010  |  Comments Off on How will the European sovereign debt crisis impact IT spending?

I’m Richard Gordon, Gartner’s first “Chief Forecaster” – welcome to my blog!

You might want to know a bit about me …

I’ve worked in the high-tech industry for more than 20 years, starting off as an engineer in electronics and semiconductor manufacturing before joining Gartner as an analyst 14 years ago. During my time at Gartner I’ve been involved in semiconductor industry analysis and market forecasting, travelling extensively and spending 5 years working out of our Boston, MA office. I’m now back in the UK and for the past 2 years I’ve been responsible for our global IT spending forecast.

My role of “Chief Forecaster” at Gartner was set up about two years ago. We wanted to improve the coordination our forecasting activities for IT spending. It’s my job to ensure that we deliver quarterly updates to our global IT spending forecast on time and with high quality. In practice, that means, every quarter going slightly nuts as 200 or so analysts work to build forecasts to schedule with coordinated assumptions.

My aim is to continuously enhance the value of Gartner’s IT spending forecast by focusing on timeliness, relevance and credibility. By starting a dialogue with the industry, I want to make our work more transparent – sharing more of the thinking behind our forecasts and, at the same time, incorporating some of the discussion and feedback that I hope this blog stimulates.
Enough of the preamble, then, and on with the first blog post! Not entirely coincidentally, it coincides with our latest quarterly forecast update!

The “IT Spending Forecast, 2Q10 Update” is on its way; the numbers are done and the reports are written (well, nearly) so let me share some of the highlights.

Our forecast for 2010 global IT spending growth in US dollars has been revised down – from 5.3% last quarter (in March), to 3.9% now. But this downward revision doesn’t signal a real slowdown. It’s really caused largely by exchange rate fluctuation, with the recent devaluation of the Euro and other European currencies against the US dollar having the most significant impact.

The decline in the value of the Euro has been caused mainly by the European sovereign debt crisis, which we’ve seen European governments struggling to contain over the past few months. Not surprisingly, this has generated quite a bit of interest among our clients, who have been asking us about the potential impact on IT spending.

Our assessment is that, in addition to the short-term currency effect on our forecast, it is likely that IT spending in Western Europe will be adversely impacted in the medium-term to long-term because government action to reduce budget deficits and debt will mean public sector spending cuts and tax rises and a period of sluggish economic growth.

However, to put the likely direct impact into perspective, Western Europe accounts for less than 25% of global IT spending overall, and public sector IT spending is less than 20% of the Western Europe total. Even stringent cutbacks in public sector IT spending in Western Europe, which would see projects being cancelled or postponed indefinitely and departmental budgets being slashed by as much as 25% per year, would likely only result in a 1% to 2% reduction in global IT spending with a marginal impact on growth at the worldwide level.

The indirect impact of government cuts on IT sending in Europe cannot be quantified so easily because of the “multiplier effect” of government spending on private sector economic activity. However, we assume that GDP growth in Western Europe will lag that of other economic regions because of the fiscal constraints imposed on government spending, which will limit the ability of government s to directly stimulate growth in the private sector.

European governments will, therefore, need to develop creative policy responses to stimulate investment in the private sector, which will, ultimately, boost IT spending and help to plug the gap caused by the likely decline in spending by the public sector in the coming years.

Away from Western Europe, as you might expect given the relatively better economic prospects, the outlook for IT spending growth in the emerging economies is rosier. For example, for 2010 through 2014, we expect IT spending growth of about 7% per year on average in Asia Pacific and Latin America, which compares to our forecast of just 2% in Western Europe.

Finally, although the USA has budget deficit and debt challenges of its own, as a result of the huge fiscal stimulus packages employed to tackle the recession in 2008 and 2009, we think it is better equipped and has more flexibility than the Eurozone to promote economic growth, which should feed through into increased IT spending. Therefore, for the USA we are forecasting annual average IT Spending growth of 4% from 2010 through 2014.

Part of our normal cycle for our quarterly forecast now is to run a Webinar where we provide an overview of the numbers and some of the thinking behind them. Of course to get the full details you need to be a Gartner client, but I think anyone with an interest in the trends in the IT industry would find the Webinar of interest. This one is on July 6th, and if you can’t attend live then a replay will be available on the Gartner website. For more information go to: IT Spending Forecast, 2Q10 Update: Growth in an Age of Austerity. If you prefer the video-short version (less than 3 minutes) that’s on YouTube (key search words: IT Spending, Gordon).

I’d welcome your comments, suggestions, and feedback.

Update: Oh, BTW, I did a short interview about our forecast release on CNBC … http://www.cnbc.com/id/15840232?video=1534780798&play=1 and Gartner’s head of Resaerch, Peter Sondergaard, did the same in the US … http://www.cnbc.com/id/15840232?video=1535010354&play=1 … compare and contrast!

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Richard Gordon
Research VP
14 years at Gartner
23 years IT industry

Richard Gordon is a research vice president in Gartner Research. He has worldwide responsibility for Gartner's Global IT Market Forecasting. Read Full Bio




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