The UK economy is set to fall into a recession that will last until the end of next year, according to the latest forecasts from the Bank of England. The Bank made the prediction last week when raising interest rates to 1.75% – the biggest increase since 1997 – to fight inflation which is now expected to hit 13%.
UK businesses will feel the pinch as consumer and business spending retracts, but analysts expect overall IT spending to remain flat. Still, CIOs will likely redirect spending toward solutions that address immediate business challenges, they added.
Rising energy costs, resulting from the war in Ukraine, are driving up prices and weighing on consumer spending and business growth. As a result, the Bank of England predicts that the UK is about to enter its longest economic recession since the 2008 financial crisis. Other bodies, including the National Institute of economic and social research, have also predicted a recession in the UK.
Even before these forecasts, there were signs that growth in IT spending was beginning to slow. In a survey of CIOs and CTOs in the US and Europe by analytics firm CCS Insights, 20% of respondents said their IT budget would increase by 15% or more this year, compared to 35% l ‘last year.
But analysts don’t expect IT spending to fall if the UK goes into recession, as it might have in the past.
Traditionally, IT spending rose and fell with GDP, says Tom Seal, senior research director at IDC, but the pandemic has severed that link. “Companies have realized that IT can drive growth and improve productivity,” he says.
“Many leaders now know that you can solve tough problems with IT solutions,” says Seal. “The way of thinking among the C-suite today has changed to the point where they’re asking, ‘Is there an app for that?'”
Additionally, the shift to cloud computing, especially SaaS applications, means that a large portion of IT spending is now a fixed cost. “You’re very dependent on SaaS apps, so you’re unlikely to turn them off,” Seal says. “Your best bet is to reduce usage, to rush things a bit, but ultimately you can’t go any further.”
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As a result, “on the whole [IT] budgets are unlikely to shrink,” Seal said. Technical monitor. “I don’t think IT spending will return to its traditional pattern.”
New IT spending priorities for a UK recession
Still, a prolonged recession is likely to change the direction in which CIOs focus their IT investments, says Bola Rotibi, research director at CCS Insights. “When people have to tighten their belts, they tend to be more cautious,” she says.
The experience of the pandemic, in which technology investments have been directed towards specific and pressing business challenges, will influence how UK businesses deploy their IT investments in a coming recession, Rotibi predicts.
“They saw what they had to do in the pandemic which was a model in many ways,” she explains. “Decisions will become more focused on addressing these issues and we will see more targeted solutions implemented.”
Chris Drake, principal analyst at GlobalData, agrees that companies are likely to focus on their immediate challenges as the economy contracts. “IT spending is broad and it’s likely spending in some areas could see cuts while spending in others could increase,” he said.
“Some projects, deemed less essential or based on longer-term requirements, may be put on hold, while we may see an increase in the use of public cloud services and IT-as-a-service spending, enabling avoid locking yourself into long-term contracts.
SaaS and cloud providers will likely benefit from this focus on near-term solutions, predicts IDC’s Seal.
“The C suite wants to quickly add applications that will solve the most pressing problems,” he says, like increasing productivity and reducing energy costs. “SaaS, vendors and cloud players are well positioned to grow during this time, provided they have answers to the most pressing business issues.”
Vendors may seek to capitalize on this demand by raising their prices, but Seal says it advises its vendor customers against SaaS.
“The best approach is to focus on improving the app to help the customer save money or get more than increasing the price,” he says. “SaaS pricing should be tied to value, not cost.”
A recent global CIO survey by investment bank Morgan Stanley found that cybersecurity and digital transformation are the areas of IT spending least likely to be cut if the economy deteriorates. Collaboration software and on-premises solutions are the most likely to be removed.