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IDC Lowers IT Spending Forecasts Due to Emerging Markets and Mobile Device Slowdown

According to the just released International Data Corporation (IDC) Worldwide Black Book (Doc #248617), worldwide IT spending will increase by 4.1% in constant currency this year, down from IDC's previous forecast of 4.6% and also down from last year's growth of 4.5%. According to the new Black Book, IT spending has been volatile since the beginning of the year, with macroeconomic wild cards including the crisis in Ukraine and the slowdown in China adding to the general sense of uncertainty, which continues to impact business confidence and investment.

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Pent-up demand should, however, drive a more positive capital spending cycle in the second half of this year. In mature economies, organizations will take advantage of a more stable business climate to replace aging infrastructure including servers, storage, and network equipment. In some emerging markets, stabilization of the economy after the slowdown that began in mid-2013 could drive a period of catch-up spending, especially in China where IT spending has cooled significantly over the past 12 months.

Mobile Device Slowdown and Exchange Rates Will Drive IT Spending Growth Lower, While Cloud Continues to Disrupt Traditional IT Budgets

Aside from macroeconomic wild cards, the other weak spot in the IT market since the previous quarter has been slowing growth in mobile devices (smartphones and tablets), due partly to price erosion and a more mature installed base. IDC has lowered its forecast for total IT spending growth this year from 4.6% to 4.1% in constant currency, primarily as a result of downward revisions to mobile device forecasts. Based on average exchange rates from Q1 2014, this will translate into US dollar growth of just 3.4% as currency volatility continues to negatively impact US-based IT vendors. In 2013, the IT market increased by 4.5% in constant currency but just 2.5% in US dollars. Excluding mobile phones, growth in 2014 will accelerate slightly from 2.9% to 3.1% (constant currency) due to the expected pickup in infrastructure investment and the related downstream effect on IT services revenues.

"As smartphone growth continues to cool from the phenomenal expansion of the past few years, tablet shipments have performed weaker than expected over the past couple of quarters," said Stephen Minton, Vice President in IDC's Global Technology & Industry Research Organization (GTIRO). "This volatility, coupled with the macroeconomic uncertainty in many emerging markets, is somewhat masking a more positive underlying foundation for enterprise IT spending, with firms continuing to invest in working off that pent-up demand to replace old servers, storage, and network gear. Some of that spending is also driving IT services, despite the fact that an increasing number of businesses are moving more of their traditional IT budget to the Cloud."

Around 10% of software spending will have moved to the Cloud by the end of 2014, while Infrastructure as a Service (IaaS) will represent 15% of all spending on servers and storage. While this is creating significant disruption for IT vendors targeting traditional IT budgets, it is also driving equally significant short-term opportunities for those vendors that successfully capture mindshare for their Cloud-based solutions. Meanwhile, both Cloud and traditional spending will be driven by the underlying pent-up demand for server and storage capacity, driven in turn by the previous, explosive growth of mobile devices that are now generating an ever-increasing volume of data. The opportunity to extract value from this data is driving strong demand for analytics tools and Big Data solutions. Many organizations will choose a gradual approach for their journey to the Cloud, with security, reliability and regulatory factors in mind, implementing hybrid and private cloud solutions. As a result, both Cloud and traditional IT spending will benefit from these drivers in the next 2-3 years.

Positive Momentum in Most Mature Economies

Western Europe will post growth of 2% in constant currency terms as most countries continue to shake off the debt crisis and return to a more stable business climate. Similarly, business confidence is gradually improving in the US, after the sequester and government shutdown of last year. Server and storage spending will rebound to positive growth after last year's slowdown, while IT services growth will accelerate to more than 2%. In Canada, IT spending growth will accelerate from 3.3% last year to 5% in 2014, due to stronger spending on PCs, servers, and storage. Japan is a different story; the pent-up demand was largely worked off in 2013, when the government's deflation-busting policies boosted business confidence and when IT buyers moved to take advantage of lower prices before new taxes came into effect at the beginning of 2014. As a result, IT spending in Japan increased by 3.4% last year, but will decline by 1% in 2014.

"Over the past year, most of the surprises on the upside have come from mature markets," said Minton. "Japan had a strong year in 2013, and a similar pattern is expected this year in North America and Western Europe. We still expect that businesses will choose to fix the roof while the sun is shining in the second half of 2014, as part of a general infrastructure investment cycle."

Emerging Markets are Volatile, Downside Risks Have Increased

Emerging markets are more volatile, with macroeconomic forecasts having been lowered since January. In Central & Eastern Europe, the crisis in Ukraine has added to the sense of business uncertainty, and IDC now expects IT spending in Russia to decline by almost -1% this year after a similar decline in 2013. The slowdown in Russia will inevitably continue to have an impact on other countries in the region, although the recovery in exports to Western Europe is a positive factor. Inflation remains problematic in many emerging markets, including Latin America, India, Indonesia, and Turkey.

China remains a wild card. On the one hand, there is significant pent-up demand for IT spending after the slowdown of 2013. On the other hand, some economists are now forecasting that GDP growth could dip below 7% in 2014 and 2015. A hard landing in the real estate sector could yet derail the expected short-term recovery in IT spending, if businesses choose to once again delay their capital spending upgrade and expansion plans. Assuming the economy remains relatively stable, the pent-up demand will drive IT spending growth back to 10% in 2014, before another likely slowdown in 2015.

"China still has a lot of room for growth, and the slowdown in tech spending last year means that a period of catch-up is inevitable," added Minton. "As long as the economy remains fairly stable in the rest of 2014, the market should perform better than last year, although growth will likely cool again after that pent-up demand has been dealt with."

IDC's Worldwide Black Book provides forecasts for IT spending in 54 countries around the world. IT spending forecasts focus on 25 individual market segments across hardware, software, IT services, and telecom services for individual countries in all regions including North America, Latin America, Western Europe, Eastern Europe, Asia/Pacific, the Middle East, and Africa. The Worldwide Black Book Query Tool presents all data in the following exchange rate views: U.S. dollars in constant currency, annual and year-to-date exchange rates, and local currency.

Additional products in this category include the Worldwide Enterprise Black Book, which analyses annual IT spending in relation to four company size segments based on employee counts. The Worldwide Black Book, Premium Edition, includes cloud spending forecasts, quarterly IT spending forecasts by region, IT vendor market share analysis, macroeconomic indicators, IT/Internet penetration, and CIO survey data. The United States Black Book: State IT Spending by Vertical Market is a quarterly analysis of the status and projected growth of the IT industry in 50 states and across 15 vertical markets.

For additional information about this research or to arrange a one-on-one briefing with Stephen Minton, please contact Sarah Murray at 781-378-2674 or [email protected]. Reports are available to qualified members of the media. For information on purchasing reports, contact [email protected]; reporters should email [email protected].

About IDC

International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. IDC helps IT professionals, business executives, and the investment community to make fact-based decisions on technology purchases and business strategy. More than 1,000 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries. In 2014, IDC celebrates its 50th anniversary of providing strategic insights to help clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. You can learn more about IDC by visiting www.idc.com.

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