Growth rates for IT spending in Europe will lag behind the US over the next few years because of slow population growth, excessive past demand for IT skills, and slow adoption of the Internet, says Forrester Research. The analyst group expects technology spending across the region to grow by just 0.7% this year, rising to 6% in 2003 and 7% in 2004. In contrast, Forrester is predicting double-digit growth in the US by 2004.
"In spite of economic unity, Europe's IT sector doesn't have the flexibility – as seen in the US sector – needed to get back to double-digit growth after the 2001 dip," says Charles Homs, a senior analyst at Forrester. He calculates that ‘excessive' IT spending amounted to €33 billion in 2000, while the same category in the US came to €48 billion. This overspending has an impact on the recovery of all European regions, says Forrester.
Analysts over at IDC, however, are far more bullish. Stephen Minton, director of IDC's European IT markets centre, says that, "The myth that over-spending on IT, the so-called bubble, will deflate IT demand for the next two years will be put to rest as the economy recovers." Minton believes that clearer return on investment figures on technology spending, wireless and broadband Internet connection roll-outs, as well as new technology platforms, will drive growth in IT spending, especially as e-business becomes increasingly central to the "wider economy".
IDC's latest research leads the company to expect that the western European IT market will grow by 6.6% in 2002, up from previous estimates of 6.4%. This compares with growth of 5% in 2001 and forecast growth of 9% in 2003. "Data has emerged in recent weeks providing early signs of overall improvement in the European business environment," says Minton. Sweden will demonstrate the strongest growth in western Europe in 2002, with IT spending forecast to rise by 8.1%.
For Forrester's forecast period, from 2002 to 2004, the UK is expected to remain Europe's largest market for IT, extending its lead over Germany and France. IT spending in Germany, Forrester says, fell by €10 billion in 2001, making it the hardest hit market in Europe. It forecasts that the German IT sector will start to recover this year, reaching €50 billion by 2003. However, it says, it will take the country until 2005 to return to the spending levels of 2000.
Market analyst IDC concurs that the German IT market will be among the weakest in Europe in 2002. That, in turn, it says, will have a negative impact on Austria, Belgium and Switzerland. "In central Europe, the downturn in the German economy has affected IT budgets," says Minton of IDC. However, like Forrester, he also sees "positive signs of a gradual recovery" in the region.
Benelux is another region that the analysts believe to be particularly challenging. In 2002 the Benelux region will account for 8% of the entire European IT market, says Forrester, but it was seriously hit by the US downturn (some 60% of its gross domestic product relies on exports). Therefore, Forrester labels the Benelux as the region where "IT was the second-biggest loser in 2001… after Germany." A full recovery in that area is not expected until 2004.
Both analyst groups are decidedly more positive about the prospects for the southern European market. Forrester expects that southern Europe will outperform the rest of the continent in the next few years. Italy has increased its IT spending faster than the median for Europe over the last few years, it says, while Spain is expected to offer the highest growth rates – close to 10% after 2003.
To put things in perspective, however, Forrester also points out that the southern market makes up just 14% of total European spending, despite accounting for 27% of the population. Furthermore, southern Europe is "still stuck in the 1980s" says Homs, "with vendors like IBM holding the fortress of AS/400-based" small and medium sized enterprises customers in such countries as Spain and Italy.