Private sector firms slashed staff at the fastest pace in over four years, a closely watched survey suggests, with companies pointing to the impact of last October’s tax-hiking Budget.
According to S&P’s purchasing managers’ index (PMI), February saw a “marked decline” in employment as firms dealt with a cocktail of weak demand, rising costs and excess capacity.
Excluding the pandemic, employment fell at the fastest pace since the global financial crisis, the survey suggested.
“One in three companies reporting lower staffing levels directly linked the reduction to policies announced in last October’s Budget,” Chris Williamson, chief business economist at S&P Global Market Intelligence said.
In the Budget, Chancellor Rachel Reeves lifted the rate of employers’ national insurance while also hiking the minimum wage. Both measures will come into force in April.
Economists are uncertain exactly how firms will respond to the extra costs imposed by the Budget, but Elias Hilmer, assistant economist at Capital Economics, said the survey pointed to “businesses cutting employment to cope with higher taxes”.
But Rob Wood, chief UK economist at Pantheon Macroeconomics, cautioned that the PMI might be giving an overly negative view of the jobs market.
“The qualitative nature of the survey – asking how many firms are cutting employment, rather than how much- is likely to exaggerate weakness after the payroll tax hikes,” he said.
A separate survey published this morning by the Recruitment and Employment Confederation (REC) showed that the number of job postings actually increased in February.
Growth weak
The PMI also showed a slowdown in demand in February, with new orders falling at the fastest pace in one-and-a-half years.
“Anecdotal evidence often cited a lack of new work to replace completed projects and cautious spending among clients in response to general concerns about UK economic prospects,” it said.
Source: S&P
New orders from abroad also dropped at the fastest pace since November 2022, with weaker sales in both the US and the EU.
As a result, the overall index slipped to 50.5, which was slightly lower than the 50.6 recorded last month but in line with economists’ expectations.
Although the reading was marginally above the 50 no-change mark, it suggests that the economy is essentially stagnant.
However, the survey pointed to a growing divergence between the services and manufacturing sector, with momentum picking up slightly in services and while manufacturing firms saw deteriorating conditions.
The manufacturing index fell to 46.4, its lowest level since December 2023.
“No doubt weak economic growth in the UK’s major trading partners such as France, Germany and China is depressing demand, but the threat of significant US tariffs and a global trade war is probably more to blame for a sharp drop in sentiment,” Thomas Pugh, an economist at RSM said.
Alongside sluggish growth, the survey pointed to growing inflationary pressures following the Budget with input prices rising at the fastest rate in 25 months.
Respondents said that their suppliers were looking to pass on the costs of April’s tax hike, while higher salary payments also pushed up costs for firms.
“A key factor behind the upturn in inflationary pressures is the growing number of firms reporting the need to raise prices in order to help offset the impending rise in staff costs associated with the National insurance hike and uplift to the minimum wage announced in the autumn Budget,” Williamson said.