UK tech sector being held back by slow economy, says KPMG

The UK tech sector marked seven years of continuous business activity expansion in Q2 2019, but, according to KPMG’s latest UK Tech Monitor Index, there are now signs that “subdued domestic economic conditions” have started to hold back growth.

The Index, which measures the strength of business activity across the sector, dropped from 54.4 in Q1 to 53.0 in Q2, to signal a softer rate of growth than at the start of 2019.

Although the index has remained above the 50.0 ‘no change’ value since the third quarter of 2012, the latest reading signposted the second-weakest rate of UK tech sector growth for three-and-a-half years.

Many survey respondents said that alongside the effect of subdued UK economic conditions on business activity growth, Brexit uncertainty had led to greater risk aversion, cuts to corporate spending and a corresponding slowdown in new business growth.

Q2 also saw a moderate sales volume increase at tech companies, contrasting with the decline reported by other areas of the UK economy.

Tech firms often cited a strong pipeline of new product innovation and entry into overseas markets as their leads for new work. However, the latest rise in total new orders received by tech firms was among the weakest recorded since 2015. Sluggish demand from domestic customers was one of the reasons often cited by survey respondents, as political uncertainty encouraged some clients to postpone new projects.

“Innovative tech software, services, manufacturing and equipment is at the heart of any business wanting to succeed in today’s market. So it is heartening to still see sales volume up and growth in the sector despite it beginning to feel the effects of political and economic uncertainty,” said Bernard Brown, vice chair at KPMG UK.

Recent data also revealed a clear slowdown in the pace of UK tech sector employment growth compared to the same time in 2018, with some firms apportioning slower hiring down to difficulties in finding suitably skilled candidates. The rate of job creation in tech did still exceed the UK economy as a whole, but the findings point to the weakest staff hiring plans in the sector for two years.

Additionally, tech firms indicated that confidence has since picked up only fractionally from the 10-year low seen in Q1. 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.

“The slowdown in both sector growth and employment growth during the second quarter of 2019 is perhaps unsurprising given the slide in business optimism reported at the start of this year and the challenging global economic landscape,” said Brown.

“Delays to business investment decisions and greater risk aversion among large corporates are likely to hold back UK tech sector performance during the second half of 2019, but exporting firms could feel a boost to sales from looser central bank policy in the US and euro area. While it is tempting to sit tight, businesses must act with an entrepreneurial and resilient spirit before we’ll see a significant, positive change in market confidence, furthermore reflected in the job market.”

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