IT spending rebounds, but industry fears double dip recession

4 Aug 2010

Strong PC shipments and enterprise IT spending saw overall IT spending rebound in the first half of 2010, with emerging markets leading the way. However, the shadow of a double dip recession lurks and IDC has prepared a scenario for the IT industry.

IT spending rebounded quickly in the first half of 2010, led by capital spending on new hardware infrastructure as businesses, governments and consumers took advantage of a stabilised economy to work off pent-up demand for new PCs, servers, storage and network equipment, according to IDC.

Emerging markets led the way, with the economic recovery driving a new wave of intense IT investment in countries such as China, India, Brazil and Russia.

As a result, IDC has raised its projection for annual IT spending in 2010 to USUS$1.51trn, representing growth of 6pc in constant currency.

Hardware spending will increase by 11pc to US$624bn, while software and services spending is set to rise by 4pc and 2pc, respectively.

“The first half of 2010 was robust by any standards for the IT industry,” said Stephen Minton, vice-president of Worldwide IT Markets and Strategies at IDC.

“PC shipments were strong, enterprise spending began to recover from the depths of the great recession, and consumers remained enthusiastic about new devices, such as smartphones.

“While the high growth rates recorded by many vendors in the first two quarters of 2010 are partly a reflection of how bad things were in the same period of 2009, there’s also no doubt that it partly reflects a very real swelling of pent-up demand for hardware replacements and upgrades.”

Projected IT market growth

Amongst mature economies, the US is set to record IT market growth of 5pc this year, recovering from the 4pc plunge in 2009. Western Europe, where economic recovery has been slower to materialise, is expected to post IT spending growth of 3pc in constant currency, while Japan is on course for growth of 0.5pc.

The real strength of the IT rebound has materialised in emerging markets, however. Growth in China this year is now expected to reach 21pc in constant currency, while other fast-growing IT markets include India (13pc), Brazil (14pc) and Russia (17pc).

“Amidst the general sense of optimism that has accompanied results from the first half of this year, there are also reasons to be wary of excessive exuberance,” said Minton.

“Our surveys indicate that businesses are still cautious about committing to new, long-term IT projects, and are still anxious about the possibility of a double dip recession. Decision-making cycles remain long, and many enterprises have contingency plans in place for the next 12 months which could see more projects suspended.”

This caution is rooted in economic uncertainty, with many economists still concerned that the debt crisis in Western Europe, the waning of government stimulus spending ,and the persistently high levels of unemployment in mature economies, including the US, might yet translate into a double dip recession in the second half of this year or the first half of 2011.

“There are very real reasons to be concerned about the near-term prospects for the global economy,” said Anna Toncheva, programme manager and economist with IDC’s IT Markets and Strategies group.

“Financial turmoil in Europe and government austerity measures could spill over into vulnerable economies, including the United States and Japan. Business confidence and stock markets are still fragile, and another wave of panic in the banking sector can’t yet be ruled out. Much will depend on the willingness and ability of governments to consider further interventionist measures in the event of downside scenarios.”

Double dip recession scenario

IDC uses a scenario model based on more than 40 years of historical correlations between IT spending and economic growth, along with other inputs, to predict the potential impact of alternative economic scenarios on its projections for IT market growth.

Based on a double-dip recession scenario, IT market growth in 2011 could be effectively flat with less than 1pc growth (versus the baseline forecast of 6pc growth, which is based on more optimistic economic assumptions).

Recovery would then be sluggish in 2012 as mature economies, in particular Western Europe, struggled to emerge from the impact of another recession. Emerging markets would recover more quickly.

“We stand in the middle of two powerful and opposing forces,” said Minton. “On the one hand, the very real pent-up demand for new IT investment, which has driven the solid recovery in the first half of 2010 and which will hopefully continue into 2011.

“On the other hand, the potential loss of confidence in a global economy which remains extremely vulnerable to any further escalation of the European debt crisis or a deterioration in the US stock market.

“The next three months will be crucial to determining which of these scenarios is more likely; in the meantime, IT vendors should plan accordingly by understanding the potential impact on their near-term revenues,” Toncheva said.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years