The collapse of Silicon Valley Bank draws attention to the continuing problems of the tech sector both in the US and here in the UK. While the Bank of England claims that there are no systemic issues in the UK resulting from the collapse it appears that many UK tech companies, perhaps a third, had relationships with SVB, although whether this leaves them exposed is unclear.
Meanwhile the latest evidence shows growth in the sector that I have previously defined as the Flat White Economy has continued throughout the pandemic-affected period at almost exactly the same pace as before. From 2009 to 2018 the sector grew at an annual real rate of 3.6%, nearly twice the pace of the whole economy (2.1%). From 2018 to 2022 the sector continued to grow at 3.5% compared with almost negligible growth in the overall economy (0.4%).[1] The impact of this on the Flat White Economy share of GDP can be seen in Figure 1. In 2022 the sector comprised 12.1% of UK GDP. To put this in context, the latest report to the House of Commons on manufacturing showed that in Q4 2022 manufacturing accounted for 9.2% of UK Gross Value Added.[2]
Moreover, the sector not only boosts GDP growth directly by growing faster than the economy in real terms but also boosts it indirectly through a falling price deflator which allows its customer sectors to purchase more of other goods and services as a result of the cost savings on their purchases of technology.
Figure 1: Flat White Economy as share of GDP[3]
Source: ONS, Cebr analysis
Our last Forecasting Eye on the subject two years ago predicted that the Flat White Economy’s share would rise to about 15%. With the changed circumstances following the Ukraine invasion and also those resulting from the persistence of the knock-on effects of Covid-19, it hasn’t risen quite as rapidly as we had expected but has certainly continued to power the economy.
Figure 2: Employment in tech sectors as a share of total employment
Source: ONS, Cebr analysis
Employment data also supports this. Between Q4 2018 and Q4 2022 employment in sectors specifically identified as information and communications technology rose from 1.3 million to 1.6 million, a rise of 23.6% (this is the lower line in Figure 2).[4]
Meanwhile one of the last reports from the now defunct Tech Nation claimed that job opportunities in the tech sector represented 14% of all job opportunities in 2022, up from 11% in 2019. The same report claims that ‘there are nearly 5 million people working in UK tech’ which would imply that around 15% of all UK jobs can be in the sector. This is consistent with the data from the broader definition of tech employment in Figure 2.
Meanwhile investment data shows that even in 2022, when tech investment slowed down, the UK raised £24 billion in tech finance, more than twice that of each of France (£11.8bn) and Germany (£9.1 bn).
It is important to note that the ONS output data tends to be revised up as startups get caught into the statistical net. So the assessment of the sector described above is quite likely to improve as the data is updated. One characteristic of the UK is that its relative economic position is systematically revised upwards compared with most other countries as a result of the buoyancy of its startup sector which tends to get included in GDP only a few years after the event.
How will this play out in the future?
Various factors seem to be becoming less supportive. The dynamism that initially drove the sector reflected migrants, especially from countries in Southern Europe, whose Euro related economic woes coincided with the emergence of the Flat White Economy in the UK. Free movement of labour and the widespread ability to speak English encouraged many who couldn’t find work in Southern Europe to come to London. Brexit has made this more difficult but on the other hand the UK has recently taken in many migrants from Hong Kong, South Asia, the Middle East and Ukraine, many of whom are likely to be strongly IT literate.
The second factor that powered the growth of the Flat White Economy was the UK’s very early take-up of online shopping which led to the rapid growth of online marketing and advertising. Now, especially after the pandemic, most other countries have caught up with the UK for online retail.
The UK still appears to have a lead in fintech, reflecting the physical proximity of the City and London’s tech centres on the City fringes. But it is less clear that other fast growing tech sectors like AI are growing noticeably faster in the UK than in other parts of the West or indeed some Eastern economies.
The overall weakening of the UK’s macro economy, driven most by weak productivity, especially but not solely in the public sector, has hit business investment which has a knock-on effect on the tech economy. The worsening fiscal position and rising taxes, especially on business, have added to the factors making the UK seem less competitive. Because most IT investment is already expensed rather than accounted for as capex, the improved investment allowances announced in the Budget do little for the tech sector. At the same time, startups were disappointed that the Chancellor only offered a partial reversal to the cut in generosity of the SME R&D deduction rate announced in Autumn Statement.[5]
Meanwhile, though the bicycle is the characteristic vehicle of the Flat White Economy workers, one suspects that the heavy hitting tech investors are much more likely to travel in cars and limos and the snarling up of London’s traffic as a result of the low traffic networks initiative[6] is likely to diminish the city’s attractions to such people.
So it seems likely that the growth in the UK’s tech economy will slow both in absolute terms and relative to other centres, although the evidence so far merely shows it growing less fast than we had predicted.
If there is a further slowdown in the dynamic tech sector, it will be a further blow to the depressed UK macroeconomic outlook – where tech has been until now one of the few bright spots.
[1] Figures are ONS GDP Output Approach Low Level Aggregates Chained Value Data
[3] For sectors included see Table 1 below
[4] Note: The narrow definition is Information and Communications employment while the broad definition also includes Professional, Scientific and Technical activities.
[6] The latest Tom Tom data shows that London has become the world’s most congested city with a sharp recent deterioration in the time taken to move around by car. See here.
Table 1: SIC Sections included in our definition of the Flat White Economy
For more information contact:
Douglas McWilliams, Deputy Chairman – Email: dmcwilliams@cebr.com – Phone: 07710 083652
Douglas McWilliams is founder and deputy chairman of Cebr. He wrote the best selling book The Flat White Economy in 2015 (updated for the paperback edition in 2016) about the emergence of the UK’s tech sector. He has also been the Chief Economic Adviser to IBM UK, on the main board of Marconi and sits on the advisory board of e-Propelled, a US based tech start-up.
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.