A report from professional services heavyweight KPMG has revealed that tech sector growth in the UK is at its lowest rate in three years. A loss of momentum in the closing months of 2018 meant business activity was at its slowest since the fourth quarter of 2015.
Despite this, the sector has a far more optimistic outlook than the rest of the UK economy in 2019, and growth will likely continue in the face of lost momentum.
The survey involved companies from IHS Markit’s Purchasing Managers’ Index, including those operating in areas such as technology software, technology services and manufacturing of technology equipment.
At 52.4 in Q4 2018, the KPMG UK Tech Monitor Index, which measures the strength of business activity across the sector, remained above the crucial 50.0 no-change value, continuing the upward trend that began in 2012. However, this is down from an index rating of 54, seen in Q3.
KPMG highlights political uncertainty and global trade frictions as key factors in denting client confidence in the technology space. Survey participants signalled the sharpest fall in backlogs of work for seven years, suggesting a lack of new work to replace completed projects at the end of 2018.
The report explains:
Survey respondents noted that concerns about the global economic outlook had acted as a break on business investment among clients at the end of 2018. There were also reports that Brexit-related uncertainty had encouraged a wait-and-see approach to new projects.
Reasons for optimism
However, staff hiring and capital spending plans remain resilient, indicating faith in the long-term prospects for UK tech, despite political and economic uncertainties brought about by Brexit, and exchange rate depreciation.
Some survey respondents suggested that a competitive incentive from the weak pound will help achieve new export sales. A strong record of R&D spending also continues to drive confidence regarding new product launches.
Almost half of the survey panel expect to boost workforce numbers, while less than one-in-ten forecast a fall.
Commenting on the findings, Bernard Brown, vice chair at KPMG UK said:
Our survey reveals that political uncertainty has dented client confidence contributing to a slowdown in growth at the end of last year. But, buoyant staff hiring and capital expenditure plans are still in place for 2019.
“This confidence is reflected in the statistic that almost 50 percent of UK tech firms intend to add jobs over the next year, whilst many traditional manufacturers are considering moving jobs offshore. This demonstrates the strength and resilience of the UK tech sector in the new digital economy.”
Internet of Business says
All the signs point towards lost momentum and widespread uncertainty in the tech sector. However, it’s important to retain a sense of perspective. At 69.8 in Q4, the Business Activity Expectations Index remained well above the neutral threshold of 50, signalling that UK tech companies are optimistic overall about their prospects for 2019.
A pipeline of new projects and successful investment in R&D over the past few years are likely to drive business activity during the year ahead and ensure the sector continues to grow in the face of difficult conditions.
A wait-and-see approach has seen clients refrain from committing to new projects, until the Brexit picture becomes clearer. This includes questions around the value of the pound, the UK’s new trade agreements, and difficulties hiring suitably skilled staff. The trade war between the US and China has further compounded the pervasive sense of uncertainty.
Assuming the UK is able to secure favourable trade deals going forward, both the government and technology companies can take solace from the fact that the slowed growth is largely a matter of short-term attitude, rather than long-term trends. Business activity will quickly ramp-up should a positive outlook somehow emerge from the current political quagmire. In the meantime, businesses will continue to call “check” until stability, of one kind or another, is restored.