Recession in UK, Japan may hit Indian IT sector

We believe that there is still some way to go for modernisation in the UK and EU and that these markets are also more receptive to cost take out mega deals. There is not a lot of new discretionary spending in the UK and EU markets. Hence, we see the current market conditions of more cost take out and large deals to continue for at least two quarters - Peter Bendor Samuel, CEO, Everest Group, tells Bizz Buzz

Recession Wave

• UK has emerged as a growth spot with many large deals bagged by big IT firms
• Recession may not impact large deal flow, but to adversely impact digital deals
• Recession in Japan to impact discretionary IT spend

Bengaluru: Despite recession in the UK economy, large cost takeout deals are likely to flow unabated for the next two quarters though discretionary spend by clients will remain under check.

According to experts, the impact of UK and Japan slipping into recession will be more on the discretionary IT spending than on cost takeout deals.

“We believe that there is still some way to go for modernisation in the UK and EU and that these markets are also more receptive to cost takeout mega deals. There is not a lot of new discretionary spending in the UK and EU markets. Hence, we see the current market conditions of more cost takeout and large deals to continue for at least two quarters,” Peter Bendor Samuel, CEO of global consultancy firm, Everest Group, told Bizz Buzz.

The UK economy slipped into a technical recession, with the final quarter for 2023 showing a decline in GDP of 0.3 per cent, on the back of a 0.1 per cent decline in growth in the third quarter, as per data released by the country’s Office for National Statistics (ONS) last week.

This has raised fears that enterprises would tighten their belts further owing to cost pressure amid a tepid demand environment.

The European Union and especially the UK had emerged as growth spots for the Indian IT industry in the last two quarters with several large cost takeout deals coming to the kitties of large service providers like the Tata Consultancy Services & Infosys among others.

TCS, which drew 16.4 per cent of its revenue from the UK in the third quarter ended December, saw its revenue from this geography growing 8.1 per cent year-on-year basis.

“If you look at our pipeline, Europe has also been good. It’s improved this (third) quarter. And we have seen our TCV in Europe also has improved. In fact, Europe geography did better this quarter compared to North America, on a sequential basis. So, it’s reasonable to expect that Europe will also return togrowth in the medium to long term,” K Krithivasan, CEO of TCS, has said during the analyst call.

Similarly, Infosys saw its revenue from Europe growing five per cent year-on-year basis in which UK played a critical role. Both companies had bagged several large deals from UK in the second and third quarters.

Meanwhile, Japan is another major economy that entered recession during the December quarter.

“We expect to see a pull-back in discretionary spending (in Japan) which will be adverse to the tech and tech services market place. Hence, we expect to see growth slow in this market. Japan is not a great market for cost takeout. So, we do not expect there to be many large deals to offset the discretionary spend decline,” Bendor Samuel said.