Morgan Stanley
  • Research
  • Nov 12, 2021

2022 Preview: Has IT Spending Returned for the U.S. and Europe?

Why Cloud Computing, Digital Transformation and Security Software could drive strong and steady IT spending growth in Europe and the U.S. for 2022 and beyond.

After plummeting in early 2020, Information Technology budgets are nearly back to pre-pandemic levels. IT spending growth in Europe and the U.S. is on track to reach 4.4% in 2021 as companies continue investing in software and services that support migration to cloud computing, digital transformation and enhanced security, among other priorities.

This positive momentum is poised to continue in 2022, with spending expected to increase 4.3%, growing above the 10-year pre-pandemic average.

These were among the key takeaways from the latest survey of CIOs conducted by AlphaWise, the proprietary survey and data arm of Morgan Stanley Research. The survey, which is based on quarterly phone interviews with CIOs, suggests that IT spending will continue trending higher, and broadly across sectors and verticals.

Looking ahead, sentiment is strong, with 40% of surveyed CIOs reporting IT budget increases since the beginning of the year, versus 26% indicating decreases. This is the highest level of positive in-year budget revisions we've seen since 2019.

Here are some of the key findings from our latest survey:

1. Structural Trends Driving Spending Priorities

Structural trends continue to drive CIO spending decisions as Cloud Computing (+12.3%), Digital Transformation (+9.7%), and Security Software (+9.7%) take the top spots for external IT projects. These priorities vary based on economic outlooks. For example, CIOs indicated that Security is the most defensible (+8%) in the event of a downturn.

While structural trends in place before the pandemic are a major factor, shifts in budget spending over the last year reflect hybrid and work-from-home technology needs. Digital Transformation (14%), Desktop/Laptop Equipment (8%), and Networking Equipment (8%) were the top three most positively impacted areas in 2021, as companies continued to build out digitally-enhanced flexible working arrangements.

2. Most Sectors See Upside

The structural trends driving spending decisions correspond with sector outlooks. We continue to see a trend of increasing growth expectations in IT spending across most sectors, led by Software, which increased 30 basis points this quarter to 4.9%. The one exception among sectors was Hardware, which saw a marginal decrease in the third quarter, falling 10 basis points to 2.8%.

Looking to 2022 budget growth expectations, Software spending growth is expected to shift higher, to 5.2%. Services will see the greatest gains, increasing 4.6% versus 3.5% average annual growth between 2017 and 2019.

3. U.S. Spending Outpaces Europe

IT spending for U.S. companies continues to be the dominant driver of growth accelerations. U.S. spending is on track to increase 4.9% and 4.7% in 2021 and 2022, respectively, versus 3% and 2.9% for the European Union

4. Tech, Healthcare and Finance Lead the Charge

While IT spending has been increasing across all verticals, Technology (+5.3%), Healthcare (+5.3%) and Financials (+5.1%) are on track to lead spending growth for 2021. That pattern is likely to play out next year.

It's worth noting that Energy is expected to post the lowest growth of any vertical (3%) in 2021, but that trajectory could change in 2022, when IT spending growth for the sector is set to shift higher, to 3.3%.

5. CIO Sentiment Suggests More Growth Ahead

CIO expectations on IT spending in the next three years continue to look increasingly bullish, with a net 40% of respondents expecting to increase total IT spending as a percent of total revenues, a small increase from the previous quarter.

Meanwhile, the up-to-down ratio for IT spending as percent of revenue over the next three years increased to 9.0x in the third quarter (up from. 6.6x last quarter). This illustrates the increasing long-term IT budget confidence of CIOs as economies continue to recover through the COVID pandemic.

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