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Shrinking Budgets: J.P. Morgan Trims 2012 IT Spending View

This article is more than 10 years old.

Analyst at both International Data Corp. and J.P. Morgan this morning provided new forecasts on 2012 IT spending, with Morgan taking a grimmer fewer, citing macro weakness in Europe and elsewhere takes a toll. There's already plenty of evidence of trouble: both Dell and Hewlett-Packard recently issued downbeat guidance for their October quarters, and Intel last week reduced guidance for the September quarter. The Street has been cutting estimates across the PC supply chain; but it appears that the issues run well beyond PCs.

But IDC expects solid growth in software to offset weakness in hardware.

IDC now sees worldwide IT spending up 6% this year in constant currency, down a bit from the 7% growth recorded in 2011. IDC asserts that "strong performance in software, storage, enterprise network and mobile device markets has offset weaker trends in PCs, servers, peripherals and telecom provider equipment." In dollar terms, the research firm now sees growth of just 4%, down from 10.5% in 2011, as a stronger dollar takes atoll on results. Including telecom services, the company sees growth this year in constant currency of 5%.

“In spite of economic uncertainty, which continues to inhibit enterprise investment in some tech segments, the continuing demand for tablets, smartphones, storage capacity and network -performance improvements actually outperformed expectations in the first half of the year,” Stephen Minton, Vice President in IDC’s Global Technology and Industry Research Organisation, said in a statement. “Software spending has been robust, even in regions where economic trends have been weakest, as businesses turn to software tools and applications as a means of implementing cost-reduction strategies.”

IDC says U.S. IT spending is expected to grow 5.9%, down from 8.5% last year. Europe is expected to grow 1%; or down 4.5% in U.S. dollars. Japan is expected to be up 2%. China is expected to grow 14% in constant currency, down from 25% last year.

“While this is a tough year for many IT vendors, the overall performance of the industry has been healthier than many expected in the first half of this year,” said Minton. “In particular, the strength of software spending seems to prove that many enterprises have unlocked significant productivity and efficiency improvements. If the economy avoids downside scenarios in the second half of the year, a PC upgrade cycle in 2013 should help to maintain this momentum.”

J.P. Morgan's tech team this morning cut its forecast for 2012 IT spending t0 1.9% growth from 2.2%.

"Macroeconomic uncertainty remains the prevailing headwind," the Morgan analysts write. "On a regional basis, EMEA continues to be at risk of further weakness, and we think that potential recoveries in China production and IT demand appear to be deferred to Q4 2012, at the earliest. Plus, the uncertainty related to U.S. government spending patterns pre and post upcoming elections could weigh. As a result, we recommend defensive stocks to navigate what is likely to be another round of estimate cuts this fall."

Morgan notes that they have actually inched up spending expectations for storage, tablets and enterprise network from their last IT spending forecast update in June. Expectations on software and services are unchanged. But Morgan has cut spending expectations for PCs, printers, service and hard drives.

The firm continues to see 2.5% spending growth on software, below Gartner's current view of 4.3% growth. For services, Morgan maintains a forecast of 1.3% growth.

Morgan advises investors to take a defensive approach to technology shares, with a focus on companies that have market share gain potential, new market entries, exposure to "studier IT spending trends on a relative basis" or a higher relative base of recurring revenues.

Here's a look at Morgan's new forecast: