Compiled by IHS Markit.
UK tech sector performance in limbo with staff hiring declining and new business activity flat-lining according to KPMG’s quarterly survey measuring the strength of business activity across UK technology sector companies.
UK tech sector performance weakest since Q2 2012
In the latest survey of the final quarter of 2019, UK tech companies reported that overall business activity was unchanged from Q3, which marked the worst performance for the sector since the current phase of expansion began seven-and-a-half years ago.
Survey respondents continued to report an intense headwind from domestic political uncertainty and subdued global trade conditions. A number of tech firms also noted that clients had delayed major spending decisions in the run up to the general election in December, resulting in a sharp loss of momentum throughout the second half of last year.
The KPMG UK Tech Monitor Index read 50.1 in Q4, down from 52.0 in Q3. The index was close to the neutral 50.0 threshold that separates expansion from contraction and the lowest reading since Q2 2012.
Political uncertainty delayed staffing decisions
Political uncertainty also contributed to a drop in staffing levels across the tech sector in the final quarter of 2019, as companies delayed hiring and became more risk averse. Some tech firms cited difficulties recruiting suitably skilled staff in an already tight labour market, which had limited their ability to fill vacancies. Although only modest overall, the fall in payroll numbers was the steepest recorded since Q2 2009.
Modest decline in new business in Q4 2019
The latest data signalled a sustained drop in new business at the end of last year, with the recorded volumes of incoming new work lowering since the middle of 2019. However, the rate of decline was only modest in Q4 and softer than that seen in the previous quarter. Subdued order books led to the sharpest fall in backlogs of work for just over ten years.
Business expectations optimistic for 2020
On a more positive note, tech companies reported upbeat business expectations for 2020, reflecting hopes of greater clarity in relation to Brexit and receding US-China trade frictions.
The degree of optimism regarding business activity in the coming 12 months is the highest recorded by the survey since Q3 2018. Tech companies often commented on opportunities from 5G rollout, new product innovation and expansion into overseas markets.
Although higher salary payments and the weak pound continued to push up operating costs, the overall rate of cost inflation in Q4 2019 eased to its weakest since Q2 2016, which helped to limit pressure on margins and potentially contributed to the optimistic outlook.
Some firms also cited hopes of a rebound in global supply chains that were hit by trade tariffs on technology products in 2019.
Bernard Brown, vice chair at KPMG UK said:
“Although our latest findings show that the UK tech sector is starting the new decade on the back foot, there are some encouraging signals for tech sector prospects in 2020.
“With the general election and ‘Brexit day’ officially out of the way, it would seem that recent political and economic uncertainty is now paving the way towards more optimism, reflected in the sharp rebound in business confidence towards the year ahead outlook. Additionally, US-China trade frictions may start to exert less of an impact on business investment decisions.
“Finally, investment and innovation in areas related to 5G technologies, automation and AI, will no doubt spur on product launches and create new markets for UK tech businesses that have the potential for global impact and reach.”
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Notes to editors
UK Tech Sector Purchasing Managers Index® (PMI®) data
UK Tech Monitor Index data is derived from a representative sub-category of approximately 150 tech companies within IHS Markit’s regular PMI® surveys of UK manufacturers and service providers. Tech is defined in this report as technology software, technology services and manufacturing of technology equipment. All figures are seasonally adjusted and smoothed using a three-month moving average, to better highlight underlying trends in the data.
Technology sector industry groups
Software publishing (SIC 582), Computer programming, consultancy and related activities (SIC 620), Data processing, hosting and related activities; web portals (SIC 631), manufacture of computer, electronic and optical products (SIC 26), manufacture of electrical equipment (SIC 27).
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 17,600 partners and staff. The UK firm recorded a revenue of £2.40 billion in the year ended 30 September 2019. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
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