Strengthening Dollar Curtails Global IT Spending Growth

January 19, 2015 Timothy Prickett Morgan

The new year is well under way and all eyes are already turning toward the end of 2015 to try to guess how much the IT market will grow. The good news is that the consensus seems to be that, in the aggregate, IT spending around the world and across all kinds of devices and services will be up this year compared to 2014. The less-than-good news–but still not bad news–is that the U.S. dollar is getting stronger and that actually cuts global IT spending projections.

The prognosticators at Gartner shaved their predictions for IT spending growth throughout 2014 as the year progressed, and this year could be more of the same unless the global economy perks up a bit. With the value of the U.S. dollar rising against other currencies last year, and Gartner’s models based on reckoning the value of the sale of hardware, software, and services in U.S. dollars, as other currencies see their values fall the amount of money this translates into in U.S. dollars falls. Last year there was pricing pressure in servers and storage, to name two key areas, but Gartner’s forecasters were predicting that spending increases would be more “normal” in the period from 2015 through 2018. This time last year, Gartner was expecting that global IT spending would rise by 3.1 percent to $3.8 trillion, and by summer the growth rate was cut to 2.1 percent to $3.75 trillion and to be more precise, $41.5 billion was removed from the global IT ecosystem. Gartner now says that IT spending in 2014 was even lower than its summer projection, and grew only 1.9 percent to $3.737 trillion.

Last summer, when Gartner made its 2014 forecast, it also made projections for 2015, and had in fact pegged growth this year at 3.9 percent over 2014’s levels. (Remember, this 2015 growth was projected against a higher aggregate spending number for 2014.) Now, after having a rethink based on the state of the global economy and the current actual IT spending environment, Gartner says to expect for worldwide IT spending in 2015 to only rise by 2.4 percent, to $3.828 trillion. There are a bunch of factors that have gone into this downward revision.

The market for devices, which includes smartphones, tablets, PCs, workstations, and printers, is not going to grow as fast as Gartner expected in 2015, and in fact the analysts have cut the growth expected from 6.4 percent to 5.1 percent and now expect for global spending on these devices to be $732 million. That is still $36 billion more than was spent in 2014, but the action seems to be in high-end phones and tablets, where the prices are high, and for low-end smartphones and tablets, where the prices are low. The midrange has hollowed out some as buyers separate into rich and poor categories, for lack of a better term. The midrange of the systems market has similarly been pushed down into low-end machines thanks to Moore’s Law over the past several decades, and has similarly hollowed out, but in this case, so has the top-end of the systems market, which is dominated by mainframes and a handful of Unix and proprietary platforms that generate a fraction of the revenues they used to.

Gartner thinks that spending on datacenter systems, which includes servers, storage, switches, routers, and other hardware that goes into computing complexes, will rise by 1.8 percent to $143 billion. In the aggregate, spending for this datacenter gear is down from the summer 2014 forecast for this year, and the reason is that customers are extending their replacement cycles and moving at a faster-than-anticipated rate to cloud-based services that obviate their needs to buy their own gear. To be even more precise, spending on servers and storage arrays has been lowered while projections for network gear has been boosted.

Enterprise software, which includes operating systems, middleware, databases, and applications, will see a 5.5 percent rise in 2015, to $335 billion. This growth will come despite the battle between on-premises and cloud-based software and the price erosion it entails. Gartner is projecting a stunning 25 percent decline in per-seat pricing for customer relationship management software between now and 2018, which is a tough price change for software makers to avoid. Gartner expects similar, but less drastic, price declines for database, middleware, and application management software in the coming year and beyond, too. With datacenter server and storage, and enterprise software down, IT services are going to take a hit as well and are now only projected to grow at 2.5 percent according to Gartner, to $981 billion, in 2015.

If you add up datacenter systems, enterprise software, and IT services, then sales for 2015 are expected to come to $1.46 trillion, up 3.2 percent from a year ago. That is better than the overall IT market at large, which includes personal devices and telecom services and which, as you can see from the table above, is set to rise by 2.4 percent to $3.83 trillion.

These projections are interesting for a number of reasons. First, they set expectations. When everyone aligns themselves to expectations, it becomes a self-fulfilling prophecy that these expectations will come true. (Some companies have to invest more, and some cut deeper, regardless of what is happening in the market at large, which is one reason why making predictions is so tough.) An expectation of rising spending–and corporate permission to do so out of fear–created the dot-com bubble, and since then, IT has been kept on a tighter leash and told to do more with less every year. We are 15 years into this, and I do not see it changing excepting an event like the Great Recession, when spending collapsed and then rose sharply but didn’t wipe out the losses. Second, projections for spending give companies a benchmark against which to measure themselves. And third, IT spending projections show the effect of the US dollar on how one gauge’s the market. This latter one is an important one.

“The change in forecast is less dramatic than it might at first seem,” explains John-David Lovelock, a research vice president at Gartner who is involved in the forecasts. “The rising U.S. dollar is chiefly responsible for the change–in constant currency terms the downward revision is only 0.1 percent. Stripping out the impact of exchange rate movements, the corresponding constant-currency growth figure is 3.7 percent, which compares with 3.8 percent in the previous quarter’s forecast.”

So this revised forecast is not as bad for IT product consumers as it is for IT vendors based on the United States who have to bring their revenues and profits back home to book them.

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