Tech growth weakest for three years: KPMG

Written by Peter Walker
21/01/19

UK tech companies have experienced a loss of momentum in the final quarter of 2018, according to KPMG’s latest market analysis, which found business activity expansion at its slowest pace since the fourth quarter of 2015.

Uncertainty around Brexit and global trade frictions have dented client confidence, but buoyant staff hiring and capital spending plans are still in place for 2019, according to the survey.

At 52.4 in the fourth quarter, the KPMG UK Tech Monitor Index - which measures the strength of business activity across the sector - remained above the 50 no-change value, which continued the upward trend since the summer of 2012. However, the latest reading was down from 54 in the third quarter.

Tech companies also signaled 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. Some tech companies have responded to subdued business investment across the wider economy by putting the brakes on staff hiring at the end of last year, KPMG noted.

While employment numbers continued to rise overall in the fourth quarter, the rate of growth continued to soften from a survey-record high seen at the start of 2018.

Operating expenses continued to rise sharply at tech firms, albeit at a weaker pace than the record highs seen in 2017. Difficulties filling vacancies pushed up staff costs, while exchange rate depreciation fueled input cost pressures for dollar denominated purchases, according to the analysis.

Looking ahead into 2019, while tech firms report that projections for demand growth have softened, they remain highly upbeat about their capital expenditure plans.

A strong record of research and development spending continues to drive confidence regarding new product launches, according to survey respondents. Some also suggested that a competitive boost from the weak pound will help achieve new export sales.

Tech businesses appear set to remain a strong engine of job creation, with almost half of the survey panel expecting to boost workforce numbers, while less than one in ten forecasted a fall. Tech sector employment plans are far stronger than that reported by the UK private sector as a whole, which are now the lowest since the first quarter of 2013.

Bernard Brown, vice chair at KPMG UK, said 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,” he pointed out, adding: “This confidence is reflected in the statistic that almost 50 per cent of UK tech firms intend to add jobs over the next year, whilst many traditional manufacturers are considering moving jobs offshore.”