Tech sector activity surges but recovery hampered by critical supply chain issues and rising component costs
Tech sector activity surges but recovery hampered
The latest KPMG UK Tech Monitor Index survey showed a sharp rebound in activity at tech firms during Q2 2021, but recovery is under threat as the sector registered its steepest increase in operating costs on record, due to rising transport, component and staff costs.
Monthly data showed that growth momentum built throughout the quarter as more pandemic restrictions were lifted and business investment picked up. The upturn in output was supported by a substantial rise in new orders that was the quickest for six-and-a-half years. This recovery in sales volumes drove a record increase in employment as tech firms looked to expand capacity and meet rising customer demand.
However, a worldwide shortage of semiconductors escalated during the second quarter of 2021 resulting in the number of manufacturers citing a lack of electrical components reaching a record high since 2004. IHS Markit’s Global PMI survey revealed that reports of supply shortages for electrical items were nine times higher than usual in May, which led to particularly severe disruption at automotive plants.
Disruptions to global technology supply chains added to cost pressures faced by UK businesses after the national lockdown. Survey data highlighted that Brexit and COVID-19 were the most commonly cited reasons for higher input prices in the second quarter of the year, although both indices have eased since the start of 2021. Staff shortages have emerged as a driver of cost pressures and constraint on growth, with record falls in candidate availability and an exceptionally strong rise in vacancies putting pressure on businesses.
Bina Mehta, Chair, KPMG in the UK, said:
“With the lifting of COVID-19 restrictions helping to ease business conditions, the tech sector is powering ahead with recovery and growth with new orders and recruitment hitting new highs. This is great news for the UK economy - as the tech sector is a major contributor to economic health and wealth.
“Against this positive outlook, there is continued pressure on margins and costs, partly due to increased supply chain expenses as a result of Brexit and the impact of the pandemic on labour costs. Furthermore, there are some clouds on the horizon; a shortage of electrical components, more widespread than at any other time during the past 17 years, is hampering the ability of tech businesses and their customers to meet their recovery plans. This could have a knock-on impact to other businesses and their long-term growth strategies, impacting the pace of the UK recovery.”
“Whilst these aforementioned challenges will test the resilience of the UK tech sector, if they can be overcome there is a window of opportunity for the industry to accelerate ahead of its European peers and consolidate its position as a global tech leader.”
At 59.2 in Q2, the headline Business Activity Index rose from 49.2 in Q1 and was well above the neutral 50.0 level that separates expansion from contraction. Furthermore, the rate of output growth was the quickest seen since Q4 2014.
The rollback of lockdown restrictions, alongside improved business and consumer confidence, helped to lift activity, according to survey respondents.
Similarly, business activity rebounded sharply across the rest of the UK economy during Q2. Overall growth was slightly faster than that seen in the tech sector, largely due to the reopening of consumer-facing areas such as hospitality and leisure.
Helping to drive the sharp upturn in business activity at tech companies was a renewed and rapid increase in total new work. At 60.0 in Q2, the index measuring new order volumes rose from 48.9 in Q1 and signalled the steepest rate of growth since Q4 2014.
Improved order books were linked to the restart of delayed projects, greater willingness to spend among clients, and increased export sales.
A rapid rise in sales led to much greater pressure on operating capacity during the second quarter. The latest survey indicated that outstanding business rose to the greatest extent since the start of the index in Q1 2003.
Consequently, tech companies added to their payrolls for a third consecutive quarter. This index rose from 52.3 in Q1 to 58.1 in Q2, which marked a survey-record rate of job creation. Staff hiring among tech companies was also faster than seen across the UK private sector as a whole (index at 57.0).
Latest data illustrated intense cost pressures at tech firms. The sector registered its steepest increase in operating expenses on record during Q2. The most commonly cited reasons for input cost pressures were Brexit and pandemic-related disruption. Survey respondents frequently cited higher staff costs, rising prices for critical components, and greater transport bills.
Higher costs were generally passed on to clients, with prices charged also rising at the fastest rate since the index began in Q1 2003.
The easing of COVID-19 restrictions and successful vaccine rollout lifted business confidence across the UK tech sector in the second quarter. Optimism reached its highest since Q1 2007.
Around 67 percent of the survey panel forecast output growth in the year ahead, while only 6 percent expect a decline. Business investment in digital infrastructure, sustainable technologies, and AI innovation are all forecast to boost tech sector activity in the months ahead.
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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).
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