Staff cuts ease as tech sector regains momentum

The tech sector bounced back in the third quarter, according to KPMG’s quarterly survey compiled by IHS Markit, as business activity started to recover from a record drop caused by the COVID-19 outbreak and subsequent lockdown in the second quarter.

The UK Tech Monitor Index showed that the sector was back into expansion mode during the third quarter, at 53.3, which is above the neutral 50 level and up sharply from 31.8 in the second quarter

Tech sector output has now returned to a "solid growth path", as more parts of the UK economy reopened and clients resumed projects that had been delayed earlier in the year.

Growth momentum across the tech sector accelerated in each month of the third quarter and the rebound has taken hold in the absence of direct stimulus measures for the sector.

By contrast, the speed of recovery in the UK economy slowed in September, with consumer-facing service providers experiencing a sharp drop in high street footfall as the government’s Eat Out to Help Out scheme ended.

Although activity across the tech sector increased as market conditions began to normalise in the third quarter, latest KPMG data pointed to subdued intakes of new work.

The index measuring new business rose from a record low of 29.7 in the second quarter to 48.2 in the third. This indicates relatively weak overall demand, albeit an improvement on the situation seen at an earlier stage of the pandemic.

A number of tech firms mentioned that corporate spending was pared back again in recent months due to the highly uncertain global economic outlook and subsequent efforts to contain costs.

Despite a challenge from budget cutbacks among clients, staff hiring trends across the UK tech sector have been far more resilient than across the wider economy so far this year.

The latest survey indicated that employment numbers among tech companies moved closer to stabilisation, which contrasted with another steep round of UK private sector job cuts in the third quarter.

While some tech firms noted that stretched margins and rising staff costs had weighed on employment, there were also reports that rising business optimism had helped to stabilise workforce numbers.

Bernard Brown, vice chair at KPMG UK, said: “The UK tech sector shines a ray of light through the economic gloom - the sector has demonstrated huge resilience with a strong v-shaped recovery in business activity over the last quarter with a positive outlook for the future, in-spite of the uncertainties presented by COVID-19."

UK tech firms are optimistic overall about their prospects for growth in the next 12 months, reflecting hopes of a sustainable recovery in client demand. At 69.7 in the third quarter, the business expectations index was up sharply from 58.5 in the second quarter and above that seen in the rest of the service sector.

Ian West, head of tech, media and telecoms (TMT) at KPMG UK, concluded: “It’s emboldening to now see the cautious optimism reported by tech firms in the Tech Monitor, which reflects the conversations we are having with TMT clients in the face of economic uncertainty.

"The UK’s reputation in innovation, buoyant startups and disruptive technological advances are proving true once more.”

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