Spending on IT around the world is forecast to slow down in 2023 as high interest rates affect the budgets of companies, according to a report from the International Data Corporation (IDC).
Overall growth this year will slow to 4.4 per cent, reaching $3.25 trillion, marginally down from a March forecast of 4.5 per cent but a swing from the 6 per cent predicted in October, the US research firm said this week.
However, the updated figure is also down from the 5.3 per cent, or $3.3 trillion, revealed by IDC president Crawford Del Prete to The National in a February interview.
“Since the fourth quarter of last year, we have seen clear and measurable signs of a moderate pullback in some areas of IT spending,” Stephen Minton, vice president at the IDC's data and analytics research group, wrote.
“Tech spending remains resilient compared to historical economic downturns and other types of business spending, but rising interest rates are now affecting capital spending.”
Enterprises and governments have to deal with the challenges of macroeconomic and geopolitical factors that hinder their ability to spend more on innovation.
The US Federal Reserve raised interest rates last month — the ninth time since 2022 — by 25 basis points and hinted that more increases to come to rein in inflation.
The International Monetary Fund (IMF), which has also warned of rising recession risks, expects global inflation to decline to 6.6 per cent in 2023, from 8.8 per cent last year, and fall further to 4.3 per cent in 2024.
It has also raised its global economic growth estimate for this year to 2.9 per cent, from a previous forecast of 2.7 per cent.
This week, IMF managing director Kristalina Georgieva said that about 90 per cent of advanced economies are projected to see the growth rate slow this year as higher interest rates affect expansion.
Russia's military offensive in Ukraine has also disrupted supplies and sent oil prices soaring, but both have since stabilised more than a year into the conflict.
The inflation fight will be the main drag on the economy, presenting a tough task for monetary institutions such as the US Federal Reserve and the European Central Bank, Mr Del Prete had said.
“That, combined with geopolitical challenges associated with the war in Ukraine … and the opening up of China, from zero-Covid to a more open policy, will also place demand on good ground. All this will create a relatively inflationary environment,” he said.
Tech spending remains resilient compared to historical economic downturns and other types of business spending, but rising interest rates are now impacting capital spending
Stephen Minton,
vice president at the International Data Corporation
The IDC expects the most significant impact from lower IT spending to be concentrated in consumer markets, with consumer IT spending now forecast to decline by 2 per cent in 2023, Mr Minton said.
“This will be a second consecutive year of declining consumer tech spending,” Mr Minton said, noting that it would be a “huge change in fortunes” from the consumer growth that hit 18 per cent in 2021.
The IDC has also scaled back its projections for a number of additional hardware categories, including servers, wearable devices and peripherals, after reductions to personal computer forecasts a month ago.
Projections have been reduced for on-premise infrastructure investments by enterprise buyers, while cloud and service provider deployments remain more resilient overall, it said.
“Service provider spending is still weakening from last year's highs as the industry adjusts to slower post-Covid growth, but planned investments by cloud and hyperscale providers have broadly held up since last month,” it said.
“Strong demand for cloud services continues to drive growth despite inflationary pressures but non-cloud spending is set to decline.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Yemeni government: Exiled government in Aden led by eight-member Presidential Leadership Council
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Habrish 'rebels': Tribal-backed forces feuding with STC over control of oil in government territory
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Favourite car: Koenigsegg Agera RS or Renault Trezor concept car.
Favourite book: I Am Pilgrim by Terry Hayes or Red Notice by Bill Browder.
Biggest inspiration: My husband Nik. He really got me through a lot with his positivity.
Favourite holiday destination: Being at home in Australia, as I travel all over the world for work. It’s great to just hang out with my husband and family.
