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IT budgets under pressure due to poor economic outlook

IT leaders in European organisations are facing a shortfall in their IT budgets this year, but the situation is expected to improve after 2024

CIOs should prepare for a 3.6% decline in IT spending this year, analyst Forrester has warned. But budgets are set to increase after 2024, as businesses ramp up tech-led projects and business initiatives.

A number of external factors have contributed to the low growth in IT spending, according to Forrester. These include the Russia-Ukraine war, high inflation and the devaluation of the euro and pound against the US dollar.

Forrester’s European Tech Market Forecast, 2022 to 2027 report highlights recession looming across Europe. The economies of Germany, Italy and Sweden are expected to see real gross domestic product (GDP) declines in 2023 as their economies move into recession. Referencing the Bank of England’s predictions, Forrester said the UK economy was likely to be in recession throughout 2023 and for the first half of 2024. According to Forrester, UK GDP is only likely to recover gradually.

From an IT leader’s perspective, Forrester believes organisations will want to focus their technology spending on how they can best achieve cost savings and operational efficiency.

The Forrester report illustrates a number of areas where government regulations in Europe may affect the progress of cloud adoption. For instance, Forrester noted that in Ireland, balancing energy demands of households and datacentres could lead to energy-intensive workloads only being run during off-peak times, when demand on the energy grid is generally lower. 

Fears of a recession will lead many enterprises to cut back on IT services spending. However, Forrester forecast that by 2024, 90% of technology spend growth would come from software and services as cloud adoption grows, with the remaining growth coming from computer and communications equipment.

Due to the pandemic, many organisations have made some progress with digitisation, streamlining tasks and using automation. In many ways, the easy wins have now been completed. To continue on their digitisation roadmaps, IT leaders are now being asked to tackle more complex digitisation projects at a time when IT budgets are growing less quickly.

Lack of skills is also set to influence how organisations go about technology innovation, with Forrester warning there are not enough European workers with science, technology, engineering and maths (STEM) skills to go round. As an example, it forecast that by 2030, the European chemicals industry would have an 11% shortage in the tech skills it needs. Car manufacturing is another sector that will be affected as it draws heavily on software innovation, with Forrester citing a lack of large technology service providers in Europe forcing carmaker Volkswagen to target developing 60% of its vehicle software in-house.

The economic outlook after 2024 is set to improve, which will drive new tech innovation. Forrester forecast that between 2024 and 2027, spending on technology in Europe would be sustained by high-value business activities, greater cyber security investment, business cloud use, IT services related to software and data, and increases in private and capital funding.

Read more about IT budget cuts

  • Enterprise budget cutting is slowing AI projects. Suppliers may not feel the impact now, but likely won’t be spared. Meanwhile, venture capitalists have cut back investments.
  • Budgets are down, social media is unreliable, the economy is rough. That could make first-party data, loyalty programmes and streaming video better marketing investments.

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