Fears for IT recovery in 2003

In November 2001 Gartner, the US giant of IT analysts, announced that the phenomenal growth in the world-wide IT sector was temporarily at an end. It predicted that the following 12-to-18 months would be Gartner’s famous “gap year”. This was to be a period “where the number one priority should be to tidy up and lay foundations for the future – to be ready when the tide turns,” as Peter Sondergaard, Gartner’s head of research announced.

That placed the predicted upturn in IT spending at around Q1 or Q2 2003.

However, there’s very little good news to indicate a prosperous New Year for the IT industry as tech companies announce further job losses and falling revenues. Not to be fazed, many analysts are still predicting that the green shoots of an IT recovery will break through in the spring 2003.

Analysts are clever guys, but they are fallible. On 18 January 2002, US analyst IDC predicted that the Western European IT market would grow by 6.4% in 2002. By March that year it had increased its forecast to 6.6%. Bear in mind that other analysts such as Forrester were predicting less than 1% growth. By 21 November IDC released a statement saying “IDC concludes that 2002 was the worst year in history for the IT industry”.

Worldwide growth rate for the IT sector was negative 2.3%. But not to be disheartened IDC said that its forecast for 2003 would be growth of 5.4% – or 2% if stock markets continued to decline and if there was a prolonged war in Iraq.

Many analysts have followed suit. Gartner predicts European IT spending growth in the region of 5.4% for 2003, and even Forrester, which was bearish throughout 2002, thinks that the European IT sector will grow by 6% in 2003 and the US technology will see double-digit spending growth again by 2004.

Maybe it’s something to do with analysts’ fascination with double-digit growth that spurs them into making these bullish predictions every quarter.

The IT industry grew by an average 12% a year for 20 years before the downturn came in 2001. Surely, the analysts argue, the next spurt of growth is just around the corner.

Stephen Minton, director of research at IDC, doesn’t believe that a return to pre-2001 growth levels will be immediate but he is very confident for the IT sector in 2003. “We expect that the IT industry will be growing faster than the overall economy in 2004. As a stepping-stone to that recovery, 2003 will be better than 2002, particularly in the second half of the year,” he says.

Minton argues the pent-up demand for IT equipment will kick-start growth: “Many companies have done very little in the way of replacing their ageing IT infrastructure during the past two years. There’s a limit to how long companies can go without upgrading and updating their existing infrastructure,” he says.

Perhaps it’s because he is a bearish Brit, but Richard Holway, director of Europe’s largest IT services and software analyst Ovum Holway, feels that the US houses are getting it all wrong. He says the IT sector is as flat as a pancake and will remain so until modest growth returns in 2004-05. The IT sector is simply behaving like any other mature sector, he argues.

“The IT industry has risen from less than 1% of GDP in the UK when I started working in the industry in 1966 to about 4% now,” says Holway.

“On average the growth in IT has rise three times the rate of growth in GDP. In the past 10 years it has risen four times the rate of GDP. Any analyst must realise that this can’t continue.”

Minton refuses to comment directly on Holway’s predictions but he says that any difference in projected IT growth are probably because “we are defining the market in different ways”.

But, Holway believes that it’s the people in the IT companies, and not the analytical theory, that are the best litmus paper for predicting future growth. And his industry contacts are not being encouraging. “I spend my working days talking one-to-one with the CEOs of companies like IBM and Sage. When I ask these people their honest views about next year the consensus view is that if you make the same revenue in 2003 as you did in 2002 you will have been doing bloody well,” he says.

He also believes that there’s not a “killer” technology like the internet emerging that will drive extra IT spend. “Anyone who believes this industry will grow by 5% next year is living in cloud cuckoo land.”

The IT industry will be hoping that Holway is wrong. But the view from within the industry is that the bears will prevail.