The US sub-prime mortgage lending crisis could lead to economic losses between US$150bn and US$400bn, according to The Wall Street Journal. While this dwarfs the effect of previous disasters such as the dot com bust, analysts remain optimistic that it will merely flatten rather than demolish IT budgets.
The expected impact of the sub-prime mortgage crisis in the US is expected to trigger losses up to four times that of the $93bn cost to the US economy resulting from the dot-com bust and at least double the $189bn deficit generated by the savings and loan disaster of the early 1980s, which led to several years of recession.
However, because the full impact of the lending crisis and the subsequent credit crunch is still not clear, opinion on both sides of the Atlantic is divided as to whether the situation will simply lead to an economic slowdown or to something much worse.
What is clear, however, is that the uncertainty of the situation is generating an attitude of widespread caution, not least in terms of IT expenditure. Nonetheless, most pundits do not expect IT budgets to be slashed over the year ahead, but rather to remain relatively flat.
Flat budgets for 2008
"Capital expenditure budgets are set in advance and aren't generally affected too much by the weather. It's discretionary, ad-hoc project spend that tends to be trimmed first in the face of adverse conditions," Martin Atherton, a research director at Freeform Dynamics said.
"But, if you're half-way through a project, it doesn't make sense to ditch it if conditions toughen -- instead it's easier to postpone initiatives if they've not already started yet," he said.
The idea that IT budgets will remain flat this year is reflected in a survey of 500 IT managers in Western Europe, the US and Asia-Pacific, published by Datamonitor in September.
The findings of this survey indicate that the 2008 IT budgets of around 50 percent of respondents will remain flat, while the majority of the remaining budgets will rise by between one and five percent. Only those questioned who expected to see investment increase by six percent or more are likely to see a cut, but, again, only by a few percentage points.
Vuk Trifkovic, a Datamonitor analyst, acknowledged that the study was undertaken before knowledge of the sub-prime market situation was common, but he said he believes its findings still hold true.
"I'd be surprised if there was a crash in budgets without the economy crashing, but there's likely to be some retrenching and I think people will be a bit more defensive in their spending. It'll be about doing things better for less, so the general themes will be optimisation and working out how to run things more efficiently," Trifkovic said.
This would have been the case with or without a credit crunch, because of rising energy and real-estate prices, as well as early indications that the economy was slowing, Trifkovic added.
Another factor is that the technology-investment cycle is currently at a "digestion" or "enhancement" phase, rather than a growth one, according to Alex Cullen, a vice president and research director at Forrester Research,
During digestion periods, technology budgets tend to grow at similar levels to the overall economy, while, in growth times, they generally grow between four and five percentage points faster.
"The technology industry is finishing up on a digestion phase and will go into a growth phase over the next couple of years. This is based not on particular technologies emerging but on the fact that there seems to be a predictable cycle around these things," Cullen explained.
As a result, for many IT departments, the year ahead will be about refocusing slightly on where they invest their money. This means that they will concentrate less on maintaining the status quo in order to simply keep the IT infrastructure operational and more on better exploiting existing IT assets in order to boost efficiency and free up budget to do other things.
It also means that any brand new technology trends are unlikely to emerge -- instead, it will...
3%
2%
