Tech industry held back by slowing UK economy

The UK technology sector marked seven years of continuous business activity expansion in Q2 2019, but there are now signs that subdued domestic economic conditions have started to hold back growth, the latest KPMG UK Tech Monitor report reveals.

The headline KPMG UK Tech Monitor Index*, which measures the strength of business activity across the sector, dropped from 54.4 in Q1 to 53.0 in Q2, signalling a softer rate of business activity growth than at the start of this year. Companies in the research often linked slower growth to lingering Brexit-related uncertainty and a weaker upturn in new business.

Sales growth contrasts with national trend

At 52.5, the New Business Index fell from 54.7 in Q1 to signal a softer increase in new orders received by UK tech companies in Q2. Although only modest, the increase contrasted with the wider UK trend, which highlighted a slight drop in new work.

Tech sector sales growth was majorly linked to new client wins overseas. A number of panellists commented that sluggish demand from domestic customers and political uncertainty encouraged some clients to postpone new projects.

Technology sector hiring stepped back due to skill shortage

The report revealed a clear slowdown in the pace of UK technology sector employment growth compared to the same time in 2018. The rate of job creation, the Employment Index, was registered at 52.7 in Q2 and edged down from 53.4 in Q1 indicating a slight expansion of payrolls that was among the weakest since 2013. Nonetheless, the rate of job creation still exceeded the UK economy as a whole.

Surveyed tech companies linked the softer rise in staff numbers to decisions not to replace leavers due to increased economic uncertainty, while others indicated that persistent skill shortages made it challenging to find new hires.

Tech sector outlook - business confidence stays close to the 10-year low seen in Q1

The slowdown in tech sector growth during the second quarter of 2019 is perhaps unsurprising given the slide in business optimism reported at the start of this year.

Tech firms indicated that confidence has since picked up only fractionally from the 10-year low seen in Q1. This was shown by the Business Activity Expectations Index rising only slightly from a ten-year low of 65.6 in Q1 to 66.0 in Q2. The latest figure was only slightly above that recorded for the UK as a whole.

Worries about global economic prospects, US-China trade tensions and the unclear path to Brexit were the most commonly reported threats to the business outlook.

However, companies who were optimistic regarding future activity linked this to new product innovations (particularly around software), company restructuring efforts, expansion into new overseas markets and new marketing strategies.

Data also shows that tech firms remain more upbeat than the average UK company with regards to hiring, profits and capital expenditure plans over the next year. Approximately 41% of tech firms plan to expand their staff numbers over the next 12 months, compared to around 10% that anticipate a decline. More than half (53%) anticipate greater profits over the next year, compared to 21% that expect a reduction.

Download the full KPMG UK Tech Monitor report for more insights.

*The index measures the strength of business activity across the sector. A reading above 50 shows an increase in overall business activity across the sector, whereas a reading below indicates a decline.