SAN FRANCISCO – Despite GDP growth in the third quarter, Deutsche Bank Equity Research expects the economy to slow materially to 1% in the fourth quarter because of follow-on effects of tighter credit conditions.

The bank also predicts the economy will improve to 2.1% in 2008.

This, in isolation, should drive slower IT capex growth during the next 6 to 9 months, the company says.

Further, the credit crunch (and associated losses posted by large financials) will likely exacerbate weaker near-term IT capex, as a result of high exposure to the financial vertical.

Over the past several years, IT spending has been tracking +5 - 7% year-over-year, Deutsche Bank says. The company adds that 2008 IT spending could slow to +2 - 4%. After last week's pullback, valuations across the sector are beginning to reflect slower growth.

There is a strong correlation between IT spending and GDP, the company says.  Deutsche Bank believes near-term macro concerns will translate into decelerating IT spending growth in 2008. That said, IT spending growth has consistently outstripped growth of the economy over the past 5, 10 and 15 years by an average of 3x, as IT spending has increased from <1% in 1990 to 6% of GDP today, the firm continues.

Data from the Bureau of Economic Advisors shows real US GDP growth was 4% year-over-year in the third quarter, while IT spending (hardware and software) decelerated to 6% compared to the third quarter last year.

Third-quarter earnings results suggest softness in IT spending with declines in discretionary IT spending, particularly in the financial vertical.

IT spending within the financial sector represents approximately 18% of total IT spending and 13% of total hardware spending, the company says.

Due to the relatively high exposure of IT spending to the financial vertical, weaker spending among this customer base will likely have a material impact on overall spending. A 5% decline in this group's spending translates to a 1-point decline in IT spending, in isolation.  More realistically, other economically sensitive verticals will also likely slow IT spending due to concerns of a weakening economy.