As the Middle East war persists, we wanted to provide an update on what this means for the business. It was our original thinking that it would wind down by the second half of 2026, but instead a ceasefire was announced and then broke down, military activity has picked back up, and oil prices are back near $100 a barrel. We sat down with Stephen Minton, Group Vice President, IDC’s Data and Analytics Group, to get an updated read on where things stand and what it means for technology spending.
Q: Last time we spoke, we were hoping this war would wind down heading into the second half of the year. Instead, it looks like a stalemate. What’s the latest, and how are things looking?
It’s kind of been a moving target since March. Initially we assumed things would start slowing down by the end of June, and now it’s the end of July. We had a peace agreement announced and then broken, with escalating military activity since. Just when we thought we were getting to the end of this war, things got worse again, and it’s becoming harder to see exactly how and when this ends.
What’s important is that it’s not just about when the war ends. It’s about what comes after: specifically, where that leaves oil prices and how long it takes supply chains to normalize. We’re not in the business of predicting government decisions or military outcomes, but we do need assumptions that drive our forecasts and, in turn, our clients’ business planning. Those assumptions now have to account for a scenario where the war continues, in some form, for longer than we expected.
The one thing that hasn’t changed is the uncertainty itself. This could end tomorrow, or it could drag on for the rest of the year, and that uncertainty has become a defining feature of this war in its own right. We’re also starting to see signs that could have real consequences: the economy has been resilient for the past year and a half, but that resilience is showing cracks. Q2 GDP growth in the U.S. came in at 1.5%, well below the forecast of over 2% and down from 2% growth in Q1. Government spending and exports were both down, likely the first real sign the war is starting to drag on the economy. China’s Q2 GDP was soft as well.
We’re moving from the initial risk of a short, sharp shock to the global economy into something more gradual: inflation dragging on activity, but over a longer period.
Q: With all this uncertainty, how should organizations plan their budgets? What are you seeing with clients?
We’re now in a period of volatility that’s increasingly about inflation uncertainty. So far, this has hit other sectors of the economy harder than IT. Underlying demand for technology and AI in particular is still very strong. But the longer this goes on, the greater the risk that inflation becomes entrenched and spills over into more sectors. It starts with oil prices and ripples outward, and once those effects take hold, they’re harder to reverse. We saw the same pattern with COVID: six years later, we still have elevated inflation in areas like services and labor costs.
Entrenched inflation also affects interest rates, which directly affects financing, and a lot of AI deals require financing. If rates rise again by year-end, that has a direct impact on spending.
This is compounding price pressures that were already in place before the war started. Back in January, we already expected AI demand and constrained manufacturing capacity to push up prices on PCs, phones, and AI infrastructure, and that’s exactly what’s happening. Average notebook prices are back above $1,000 for the first time in years, and most IT vendors have implemented significant price increases.
That’s going to weigh on demand in the second half of the year. Right now it’s not obvious in the data. Earnings are up, and our IT spending forecast has actually increased over the last couple of months, but that’s largely inflation, especially on hardware. We’re forecasting a decline in unit shipments even as spending rises, because buyers pulled purchases forward into Q1 and Q2 to get ahead of prices that are expected to climb even higher by year-end.
Prices aren’t going to moderate or reverse anytime soon, and the longer the war goes on, the worse this could get. It’s also piling on top of existing supply chain pressure. Components like helium and other semiconductor manufacturing inputs sourced from the Middle East are in short supply, adding more pressure to ICT inflation. So the war isn’t the root cause of IT inflation, but it’s exacerbating and complicating it. The more that inflation spills over into the broader economy through higher energy costs, the harder it becomes for businesses to keep stretching their IT budgets to cover it.
We’ve seen amazing elasticity in IT budgets over the past year, with buyers stretching to pay more just to keep pushing forward with AI deployments, but that can’t go on forever. At some point those budget conversations get harder, and how quickly AI is generating ROI and efficiency gains versus revenue becomes a bigger factor in that math.
Q: What advice are you giving clients on how to prepare, especially with 2027 planning already starting?
Three things.
First, prices are likely to keep rising through the rest of this year. 2027 is a more open question, but if you have budget to spend before year-end, you’re unlikely to regret spending it now. Waiting for a Q4 price drop is a risky bet, and that risk grows the longer the war continues. There’s also a case for pulling forward some spending planned for the first half of next year, though that’s a tougher call since prices are more likely to moderate by the end of 2027 than by the end of this year. Either way, don’t leave all your spending exposed to price increases; diversify the timing of your investments.
Second, look for ways to protect against near-term inflation exposure, for example, shifting from CapEx to OpEx. There are strong “IT spending as a service” offerings from vendors now that build more predictability into budgeting and help offset some of that uncertainty. Depending on your industry, diversifying supply chains and suppliers also reduces exposure if the war worsens rather than improves.
Third, get serious about measuring AI ROI. You need to prove your AI investments are generating returns that offset the broader inflation and uncertainty. Everybody has to prove it to someone: the CFO to the CEO, the CEO to the board and shareholders. AI maturity varies widely right now, and not every company is generating returns at the same pace. This isn’t the time to keep funding investments that aren’t working. Put better gating in place so you can reallocate spend quickly. There’s a lot of talk about capping token usage, but the more important question is whether your tokens are generating returns. If they are, why limit them? The real challenge is targeting spend in the right places, not deciding in advance that AI spending needs to go up or down by some fixed percentage.
So: spend early where it makes sense, hedge your exposure, and get better at measuring where AI spend is actually paying off.
Q: What’s one thing clients should watch, and how can they rely on IDC to navigate this?
It’s all about data. Data is the light in the coal mine. It’s the only way to understand what’s actually happening beneath all this uncertainty, and we need to stay close to it. Uncertainty is high enough right now that it’s not viable to plant a flag on a second-half forecast, walk away, and expect it to still be accurate in September. The tide is coming in, and that flag is going to get washed away.
That’s where we can help. We update our IT spending forecasts every month in our Black Book, and our quarterly trackers give granular, current numbers on how the market is actually performing. That rapid iteration matters, and the same discipline should apply internally to how organizations measure their own AI performance metrics as they build next year’s budgets.
But data needs context. That’s why having people with the experience to interpret the numbers and turn them into decisions is just as critical as the data itself. AI can help with that, but the judgment still matters. Downturns are often marked by companies losing that kind of expertise from their workforce. There’s a real opportunity right now to equip people with both the AI tools and the data to interpret them well, and hopefully navigate this period of volatility more successfully than in past cycles.
