In our latest KPMG UK Tech Monitor report for Q2 2021, we found that there has been a sharp rebound in activity at tech firms during the quarter – however, recovery is under threat as the sector registered its steepest increase in operating cost on record. The survey respondents reported that this is due to rising transport, component, and staff costs.
Monthly data also showed that growth momentum had built throughout the quarter as more pandemic restrictions were lifted and business investment picked up. The upturn in output was supported by a substantial rise in new orders that was the quickest for six-and-a-half years. This recovery in sales volumes drove a record rise in employment as tech firms looked to expand capacity and meet rising customer demand.
With the lifting of COVID-19 restrictions helping to ease business conditions, the tech sector is powering ahead with recovery and growth with new orders and recruitment hitting new highs. This is great news for the UK economy - as the tech sector is a major contributor to the nation’s economic health and wealth. Against this positive outlook, there is continued pressure on margins and costs, partly due to increased supply chain expenses as a result of Brexit and the impact of the pandemic on labour costs. Furthermore, there are some clouds on the horizon; a shortage of electrical components, more widespread than at any other time during the past 17 years, is hampering the ability of tech businesses and their customers to meet their recovery plans. This could have a knock-on impact to other businesses and their long-term growth strategies, impacting the pace of the UK recovery. Whilst these aforementioned challenges will test the resilience of the UK tech sector, if they can be overcome there is a window of opportunity for the industry to accelerate ahead of its European peers and consolidate its position as global tech leader.
Above 50 = growth, seasonally adjusted; Above 50 = growth in the next 12 months
Business activity expands at quickest rate since Q4 2014
The rollback of lockdown restrictions, alongside improved business and consumer confidence helped to lift activity, according to survey respondents.
Similarly, business activity rebounded sharply across the rest of the UK economy during Q2. Overall growth was slightly faster than seen in the tech sector, largely due to the reopening of consumer-facing areas such as hospitality and leisure.
The Business Activity Index rose from 49.2 in Q1 to 59.2 in Q2, which is well above the neutral 50.0 level that separates expansion from contraction. Furthermore, the rate of output growth was the quickest seen since Q4 2014.
Fastest increase in new orders for six-and-a-half years
Helping to drive the sharp upturn in business activity at tech companies was a renewed and rapid increase in total new work. At 60.0 in Q2, the index measuring new order volumes rose from 48.9 in Q1 and signalled the steepest rate of growth since Q4 2014.
Improved order books were linked to the restart of delayed projects, greater willingness to spend among clients, and increased export sales.
Steepest rise in tech employment since the survey began in 2003
A rapid rise in sales led to much greater pressure on operating capacity during the second quarter. The latest survey indicated that outstanding business rose to the greatest extent since the start of the index in Q1 2003.
Consequently, tech companies added to their payrolls for a third consecutive quarter. This index rose from 52.3 in Q1 to 58.1 in Q2, which marked a survey-record rate of job creation. Staff hiring among tech companies was also faster than seen across the UK private sector.
Rapid increase in costs as wages rise and supply chains come under strain
Latest data illustrated intense cost pressures at tech firms. The sector registered its steepest increase in operating expenses on record during Q2. The most commonly cited reasons for input cost pressures were Brexit and pandemic-related disruption. Survey respondents frequently cited higher staff costs, rising prices for critical components, and greater transport bills.
Higher costs were generally passed on to clients, with prices charged also rising at the fastest rate since the index began in Q1 2003.
Business confidence highest for over 14 years
The easing of COVID-19 restrictions and successful vaccine rollout lifted business confidence across the UK tech sector in the second quarter. Optimism reached its highest since Q1 2007.
Around 67 percent of the survey panel forecast output growth in the year ahead, while only 6 percent expect a decline. Business investment in digital infrastructure, sustainable technologies, and AI innovation are all forecast to boost tech sector activity in the months ahead.
About the UK Tech Monitor report
KPMG releases a quarterly report highlighting the key trends, opportunities, and challenges facing the technology sector.
KPMG uses IHS Markit as the provider of the UK Tech Monitor Index data for the UK Tech Monitor Report.
Please note, these figures are accurate as of 27th July 2021.