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Study: IT spending to slow down in 2007

But spending rates should bounce back to double digits by the end of the decade, market researcher Forrester says.

U.S. information technology spending is in for a slowdown in 2007, Forrester Research predicted in a new report Tuesday.

IT spending growth will drop from 7 percent hikes in 2005 and 2006 to a 2 percent rise in 2007, before bouncing back to double-digit figures by the end of the decade, the market researcher said.

The forecast is based on spending trends, which show that IT markets are driven mainly by overall economic growth and adoption of new technology. The current period of Internet adoption, which began in 2001, has seen overall tech spending averaging the 7 percent growth in nominal U.S. gross domestic product.

Forrester expects gross domestic product growth to slow over the next two to three years due to factors such as spiraling interest rates, rising energy prices and a likely drop in the housing market. This, in turn, will slow growth in tech spending as 2007 approaches.

"Technology spending is currently very brittle," Andrew Bartels, vice president at Forrester, said in a statement. "Without a 'must-have technology,' most businesses are only investing in technologies with tangible (return on investment). That means they will respond quickly if corporate revenues and earnings start to slow in an economic slowdown, which seems likely at some point in the next couple of years."

According to Forrester trend analysis, technology investment cycles alternate between growth and innovation, and digestion. Currently, the market is in a period of digestion of Internet technologies that began in 2001. The next cycle of technology innovation and growth will begin in 2008-2009 as emerging technologies such as voice over Internet Protocol and server virtualization mature.

Among key drivers of the next cycle of investment will be digital business architecture based on virtualized hardware and network resources; extended Internet representing new applications ranging from RFID and telematics to mobile networking and biometrics; a new business model for research and development; and software development using social computing and sources of talent and capital from all over the world.

The study predicts that investment in information technologies and services will fluctuate for rest of the decade. Computer sales will see a compound annual growth rate of 9 percent through 2008. Factors like price and performance improvements will result in strong growth in servers, PCs and storage hardware into early 2006, but new investment will slip in late 2006 and 2007 before rebounding in 2008.

Software spending will hold steady at about 6 percent. But IT services spending will drop in 2007, Forrester said. The revival in IT consulting and systems integration that began in 2005 will slump to 1 percent by 2008. However, growth will rebound to 13 percent by end of the decade.