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UK IT spending to be slashed by 10 percent after Brexit: Canalys

Traffic passes around the Old Street roundabout, also referred to as 'Silicon Roundabout,' in the area known as 'Tech City' in London, U.K.
Chris Ratcliffe | Bloomberg | Getty Images
Traffic passes around the Old Street roundabout, also referred to as 'Silicon Roundabout,' in the area known as 'Tech City' in London, U.K.

With Britain still counting the ramifications of its shock decision to quit the European Union (EU), spending in the nation's information technology sector is expected to receive a blow as companies reassess their businesses amid volatile market conditions.

Research firm Canalys expects 2016 I.T. spending in the U.K. to drop as much as 10 percent due to uncertainty surrounding the future of Britain's trading relationship with the EU.

Canalys previously estimated I.T. spending in the U.K. to be in the range of $90 billion to $100 billion for the year, on the assumption the nation would remain part of the trading bloc.

"The outlook for 2017 could be even worse, with up to a 15 percent decline as I.T. budgets are set lower on the prediction of a tough year ahead and ongoing uncertainty," said Matthew Ball, principal analyst at Canalys.

On Sunday, economists at Goldman Sachs wrote in a report the U.K. is likely to enter a "mild recession" by early 2017, with gross domestic product expected to take a 2.75 percentage-point hit in the next 18 months.

The most pronounced impact of the Brexit vote was on the British pound, which tumbled to a 31-year low on Monday, extending losses to nearly 12 percent from levels before the results were announced Friday.

A weaker pound will be a key issue for the U.K.'s I.T. sector, with technology prices rising due to higher import costs, according to Ball.

"Contracts will have to be renegotiated and proposals re-quoted due to the strong shift in value," he said. "Any new activity will be suspended until rates stabilize."

He added international businesses will have to reassess their sterling cash position and level of exposure to ensure their assets are adequately hedged against.

The impact of the British vote will also be felt by technology companies on the other side of the pond, according to S&P Global Market Intelligence equity analyst Scott Kessler.

"The S&P 500 technology sector generates a greater percentage of revenues from non-U.S. sources than any other sector," said Kessler. In 2015, 58 percent of the sector's sales were from outside the U.S., compared to 44 percent for the S&P 500 as a whole, he said.

S&P Global Market Intelligence calculations showed about four S&P 500 technology companies, based on recent data, had an exposure to the U.K of 10 percent or more. E-commerce player eBay had a 16 percent exposure while digital payments firm PayPal had an exposure of 13 percent.

"Weaker consumer spending in the U.K., perhaps due in part to Brexit uncertainties, could adversely affect eBay and PayPal," said Kessler.

For tech giants Alphabet, Google's parent company, Kessler added the U.K., which contributed about 9 percent of its 2015 revenues, has become "less important" over the years, and that it has "sophisticated foreign currency hedging programs" to help reduce related risks better than many of its peers.

The S&P 500 technology sector closed down 2.11 percent on Monday, according to Thomson Reuters data.

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