Tech sector expansion ‘grinds to a halt’

The UK tech sector’s performance is in limbo, with staff hiring declining and new business activity flat-lining in the fourth quarter of 2019, according to KPMG’s latest market analysis.

UK tech companies reported that overall business activity was unchanged from the third quarter, 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. KPMG also noted that a number of tech firms’ 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 professional services firm’s UK Tech Monitor Index read 50.1 in the fourth quarter, down from 52.0 in the third quarter. The index was close to the neutral 50.0 threshold that separates expansion from contraction – and the lowest reading since the second quarter of 2012.

Political uncertainty also contributed to a drop in staffing levels across the tech sector in the final quarter of last year, 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 the second quarter of 2009.

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 the fourth quarter and softer than that seen in the previous quarter. Subdued order books led to the sharpest fall in backlogs of work for just over 10 years.

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 was the highest recorded by the survey since the third quarter of 2018. KPMG explained that 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 the fourth quarter 2019 eased to its weakest since the second quarter of 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.”

He added: “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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