Bracing for Impact: Why PAC Is Rewriting Its Market Outlook

PAC has today published an adjusted scenario for the IT services markets. Why PAC is Adapting its Market Outlook?

We live in uncertain times, with the aftershock of the US Government’s tariffs continuing to reverberate across the world.

No industry sector is exempt from the fallout. From Brazilian aeroplane manufacturers to German beer brewers and Vietnamese games console producers, it is practically impossible to find a company that isn’t bracing itself for downturn or disruption.

While the unprecedented shock caused by the Covid-19 pandemic led many organizations to build more agile supply chain strategies, most have been caught cold by the “shotgun” tactics of the Trump administration.

So, what has been the impact on the software and IT services sector, the industry that PAC has tracked, analyzed and sized for almost 50 years? Our conversations with both the buy-side and sell-side of the sector confirm that the impact has been a renewed level of caution on spending on all but the most critical projects and programmes.

For manufacturing businesses with a strong dependence on US exports, the threat of tariffs is likely to have a direct impact on their IT budgets. In cyclical downturns, the first areas to be cut include IT equipment purchases; IT staff augmentation/resourcing; tactical, non-critical software development projects; and non-critical consulting assignments.

But the current uncertainty is having a much wider impact beyond manufacturing. Retailers are concerned that a rise in the cost of imported US goods will negatively affect consumer spending. Transport companies may also be hit by lower shipment volumes, while in the utilities sector, operators focused on renewables will be hit in the wallet by escalating costs of solar and wind production infrastructure. In all of these sectors, PAC expects a squeeze on discretionary spending.

As a result, PAC has dialed down its forecasts for software and IT services spending across all major territories. We expect Canada, Mexico and the US itself to be the markets where software and IT services spending are most impacted – although we have also priced in the impact of the DOGE cost-cutting initiatives into our reappraisal of the US. While the US was the first major market to slow down in the middle of 2023, it was also the first one to start to recover over the course of 2024. We were anticipating a noticeable acceleration in 2025, boosted by a robust economy; but our current expectation is that it will be the worst-performing market this year.

This is a preliminary update that reflects the more cautious approach that we have seen in the last couple of weeks. But the situation remains so volatile that further changes are likely as the tariffs are negotiated, adapted and implemented.

But while there is an air of gloom descending over the sector, it is important to remember that the underlying drivers for software and IT services investment remain in place. Organizations continue to become more dependent on a fast-evolving technology landscape to run their day-to-day operations, and most continue to lean on external partners to gain access to the skills they need to fully harness its potential.

Even during the last couple of weeks of upheaval, businesses and institutions continue to up the ante with their digital ambitions. In Germany, the Government announced plans to introduce a new dedicated ministry for Digital and State and Modernization. UK retail group New Look has raised £30m to “super-charge” its digital strategy, while Swiss-Belhotel International will invest in new CRM, booking and loyalty systems this year. And on the other side of the Atlantic, US Bank announced plans to acquire software company Talech as part of its plan to diversify into providing software and services to SME customers.

You can view PAC’s latest market outlooks here. Not yet a client and want access to the rankings? Contact us now.