The UK economy is set to fall into a recession that will last until the end of next year, according to the latest forecast by the Bank of England. The Bank made the prediction last week as it increased interest rates to 1.75% – the steepest increase since 1997 – to combat inflation that is now predicted to reach 13%.
UK companies will feel the pinch as consumer and business spending retracts, but analysts predict that overall IT spending will hold steady. Nevertheless, CIOs will likely shift their spending towards solutions that address immediate business challenges, they say.
Increased 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 think tank, have also predicted a recession in the UK.
Even before these forecasts, there were signs that growth in IT spending was starting to slow. In a survey of CIOs and CTOs in the US and Europe by analyst company CCS Insights, 20% of respondents said their IT budget will grow by 15% or more this year, down from 35% of respondents last year.
But analysts do not expect IT spending to shrink if the UK enters a recession, as it might have done in the past.
Traditionally, IT spending rose and fell in line with GDP, explains Tom Seal, senior research director at analyst company IDC, but the pandemic broke that link. “Companies realised IT could drive growth and improve productivity,” he says.
“A lot of leaders now know that you can solve challenging problems with IT solutions,” says Seal. “The thinking today among the C-suite has changed to the point where they ask, ‘Is there an app for that?’”
In addition, the move to cloud computing, especially SaaS applications, means that much of IT spending is now a fixed cost. “You are very reliant on SaaS applications so switching any of those off is unlikely,” Seal says. “Your best chance is to reduce utilisation, squeeze things a little bit, but ultimately there is only so far you can go.”
As a result, “overall [IT] budgets are unlikely to reduce,” Seal told Tech Monitor. “I don’t think IT spending will go back to its traditional pattern.”
New IT spending priorities for a UK recession
Nevertheless, a prolonged recession is likely to change where 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 careful,” she says.
The experience of the pandemic, in which technology investments were directed towards specific, urgent business challenges, will influence how UK businesses deploy IT investment in an upcoming recession, Rotibi predicts.
“They’ve seen what they had to do in the pandemic which has been a blueprint in many respects,” she explains. “Decisions will become more targeted towards solving those problems and we will see more focused solutions being implemented.”
Chris Drake, a principal analyst at GlobalData, agrees that businesses are likely to focus on their immediate challenges as the economy shrinks. “IT spending is broad, and it is likely that spending in some areas could see cutbacks while spending in others could increase,” he says.
“Some projects, which are seen as less essential or based on longer-term requirements, could be put on hold, while we could see an uptick on the use of public cloud services and as-a-service IT spending, which allows businesses to avoid getting locked into long-term contracts.”
SaaS and cloud providers are likely to benefit from this focus on short-term solutions, IDC’s Seal predicts.
“The C-suite want to quickly add applications which will solve the most pressing problems,” he says, such as boosting productivity and cutting energy costs. “SaaS vendors and cloud players are well positioned to grow during this period provided they have answers to the most pressing problems businesses have.”
Vendors may seek to capitalise on this demand by increasing their prices, but Seal says he is advising his SaaS provider clients against it.
“The better approach is to focus on improving the application to help the client save money or achieve more [rather] than put up the price,” he says. “SaaS pricing needs to be linked to value, not cost.”
A recent global survey of CIOs by investment bank Morgan Stanley found that cybersecurity and digital transformation are the areas of IT spending that are least likely to be cut if the economy worsens. Most likely to be cut are collaboration software and on-premise solutions.