UK tech companies hit hard amid political turmoil

Business confidence, growth and sales volumes in decline according to KPMG’s quarterly survey measuring the strength of business activity across UK technology sector companies.

The latest survey reveals a downturn in new work across the tech sector for the first time since the middle of 2012, due to softer global economic conditions and ongoing domestic political uncertainty. Subdued business and consumer spending meant that UK tech companies experienced another slowdown in business activity growth during the third quarter of 2019. The loss of momentum was widely attributed to delayed decision-making among clients.

The Q3 KPMG UK Tech Monitor Index registered 51.9 in the third quarter of 2019, down from 52.9 in Q2. While the Index remains higher than the crucial 50.0 value that separates expansion from contraction, the latest reading signalled the slowest rate of UK tech sector growth since Q4 2015.

While tech firms are finding growth more difficult to achieve, their performance remains stronger than elsewhere in the flatlining UK private sector (equivalent index posting 50.1 in Q3).

Global economic slowdown and Brexit worries hold back demand
The data revealed a drop in new orders received by UK tech sector companies at the steepest rate of decline since Q4 2011.

Anecdotal evidence suggested that Brexit-related uncertainty remained a key headwind to sales volumes, alongside a dent to business confidence from US-China trade frictions. Survey respondents also noted a corresponding drop in business investment spending.

A lack of new orders to replace completed projects also led to a sharp and accelerated drop in backlogs of work.

Staff hiring plateaus following 10 year growth

Reduced capacity pressure, and concerns about the near-term business outlook contributed to more cautious staff hiring policies in Q3, with unchanged employment across the tech sector, ending 10 years of workforce expansion.

With signs of greater pressure on margins in Q3, input cost inflation accelerated to its highest for one year, while average prices charged rose at a slower pace. Exchange rate depreciation against the US dollar was widely reported as a key factor pushing up business expenses.

Business expectations for the next 12 months remained subdued in the third quarter of 2019, which survey respondents linked in part to worries about the path to Brexit.

Companies anticipating growth cited the roll-out of new products and technologies, alongside hopes of a rebound in export sales.

Bernard Brown, vice chair at KPMG UK said: “The latest reading shows that continued uncertainty in the UK amidst signs of weaker global economic growth is weighing on the performance of UK tech firms. Businesses are losing confidence and combined with activity expectations nearing lows last seen during the recession, it is easy to see why. Any positive growth forecasts cited for 2020 are often dependent on a clearer path to Brexit in the coming months, painting a pretty gloomy picture.

“Worries over the outlook may seem well-founded as tech companies recorded the steepest drop in new orders in eight years alongside reports of cancelled or delayed spending on projects.”

He added: “But there is hope. The sector has plenty of avenues from which to rediscover growth, scale up, and attract new sources of business. AI and automation are two significant opportunities to drive profits. After all we must not forget the resilience of the tech sector, which continues to outperform other parts of the economy such as manufacturing, transport and hotels & restaurants.

“Of course the sector has been here before. In 2012 it rebounded following a similarly sharp contraction. However, with potentially volatile repercussions, it will be interesting to see how this will play out in the coming months.”

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David Dungay

Editor - Comms Business Magazine