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Will Europe cast shadow over IT spending?

Global information technology spending is on the upswing, but worries about the economic prospects in the European Union could hamper a rebound, according to a pair of reports.

Global information technology spending is on the upswing, but worries about the economic prospects in the European Union could hamper a rebound, according to a pair of reports.

IDC reports that global IT spending is expected to increase 3.8 percent for 2010 at constant currency to $1.47 trillion. Hardware will post the strongest growth, up 6.4 percent from a year ago. Software spending will be up 3.1 percent from a year ago.

Worldwide IT spending fell 4.2 percent in 2009 based on constant currency (or 7.3 percent in U.S. dollars).

The rub: The growth in IT spending thus far revolved around pent-up demand, said IDC analyst Stephen Minton. However, Minton also noted that there's caution and long-term projects are being held up.

The biggest worry according to IDC may be Europe. IDC said:

One of those weak spots is Western Europe, where the current debt crisis in Greece has raised concern over the short-term prospects for the European Union. Even before that crisis reached its recent levels of alarm, the European economy and IT market were recovering sluggishly. IT spending in Western Europe is expected to be flat this year in constant currency, after plunging by 6.5% in 2009 (a decline of 13.5% in U.S. dollars). Representing almost a third of global IT spending, Western Europe is a hugely important market for technology vendors, and any further strains on the confidence of European businesses and consumers could cast a cloud over the outlook for the second half of this year.

Deutsche Bank analyst Chris Whitmore also highlighted the Europe issue for technology vendors. So far, the recent earnings reports haven't showed many worries. HP, Dell and Cisco all said Europe was solid. Dell did note that U.K. spending was weak due to budget problems. But analysts expect Europe to become an issue for technology spending.

Whitmore said in a research note:

On average, the hardware group generates about 30% of its revenue from Europe, giving it meaningful direct exposure to the crisis. Beyond the currency translation impact, we expect a slowdown in GDP growth in Euroland resulting from austerity measures and decreased access to cheap capital and financing.

The magnitude of the forthcoming spending slowdown in Europe is difficult to measure, but we’d expect some impact to both GDP growth expectations and IT spending in 2H-10 and 2011.

This story is also likely to play out for software vendors and other enterprise technology players. Simply, put any company with significant European operations will think twice about technology projects and that pause will hurt vendors too.