Hopes are rapidly dwindling that there will be even modest growth in technology spending during the second half of 2011. And 2012 may be no better.
Underscoring how governments around the world are rapidly scaling back purchases to try and reduce swelling deficits, the U.S. Navy shocked technology executives last month by quietly announcing it planned to cut its IT budget by a whopping 25 percent over five years.
While most analysts do not expect other agencies to attempt such dramatic cuts, they say that the Navy's plan is a clear indicator that governments have joined businesses in taking a more critical look at technology spending.
That latest bombshell, coupled with warnings from bellwether technology vendors from Dell Inc to Cisco Systems Inc, are prompting analysts to trim their forecasts and warn of threats to the bottom lines of major suppliers from IBM to Hewlett-Packard Co.
They are putting more scrutiny on spending. They are looking at cutting back, said Rebecca Wettemann, an analyst with technology research firm Nucleus Research.
It is unclear what might happen to budgets at other U.S. agencies as they wait for a congressional deficit super-committee to identify new spending cuts. The group is charged with finding at least $1.2 trillion in budget savings by November 23.
Meanwhile, European technology budgets are likely to contract as the region's economy worsens.
We could go into an economic recession and see tech spending decline, said Forrester Research analyst Andrew Bartels.
While Bartels remains hopeful that global IT spending will grow in the second half, he warns of a high probability Europe will slip into a recession in the third or fourth quarter, causing tech spending there to drop from last year.
Gartner, the world's biggest technology research firm, is planning to cut its forecasts for IT spending when it updates those numbers next month.
It now expects spending to rise about 3 percent at constant currency in the second half of this year, below its current forecast for 3.6 percent growth.
FROM BAD TO WORSE
Gartner also projects that IT spending will grow about 3 percent next year, below the current forecast for 5 percent growth, said Gartner analyst Richard Gordon.
We are still in the hangover of the global financial crisis and the subsequent recession, he said.
Other experts on technology spending are even more pessimistic.
Two academics who advise big corporations on technology strategies said that some of the world's biggest corporations could cut IT budgets before the end of the year. That could cause total technology spending to drop in both the fourth quarter and all of 2012.
Eric Johnson, director of the Center for Digital Strategies at the Tuck School of Business, said hardware makers in particular will be under pressure because companies are delaying upgrades of PCs and servers. Instead they are spending money on smaller, portable devices like Apple Inc's iPad, which has a lower unit cost.
There is a huge movement going on to less-expensive devices. It's a tidal wave, he said. I call it the deflation of technology.
One of the main victims of that trend is HP, which just killed the TouchPad tablet it created to challenge the iPad, cut earnings projections, and announced it is considering pulling out of the PC business, where it is the largest player.
HP waited too long to get out of the PC business, Johnson said.
Howard Anderson, a lecturer at MIT's Sloan School of Business, said his contacts in the corporate world are cutting back on hardware purchases. But he expects Apple and makers of other hot mobile devices to fare better in coming months than most technology companies because consumers are so far willing to spend on the latest gadgets.
If I work for a corporation, it's 'Guess what? Your laptop is going to last another year. Suck it up,' he said. But if I absolutely have to have the next iPad or iPhone, I'll find a way to buy it.
(Editing by Edwin Chan and Tim Dobbyn)