UK businesses are reducing staff numbers at the sharpest pace since the global financial crisis of 2009, excluding pandemic-related drops, as a result of rising employment costs and the Labour government’s tax-raising budget. This alarming trend was highlighted by the December Purchasing Managers Index (PMI) survey, a critical gauge monitored by the Treasury and the Bank of England.
According to the survey of 1,300 manufacturers and service sector firms, December saw a significant drop in employment levels driven by weaker demand, increased employment costs, and tightened profit margins. The PMI survey recorded a score of 50.5, consistent with November, signaling stagnation in private sector growth.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the results: “Economic growth momentum has been lost since earlier robust expansions. Businesses and households are reacting negatively to the Labour government’s tax increases and regulatory policies. National insurance contribution hikes and staffing regulations have led to a sharp pull-back in hiring.”
The survey also highlighted major growth challenges, including fragile consumer confidence, stricter corporate budgets, and cuts to non-essential spending. Rising wage costs and domestic inflation further compounded pressures on businesses.
Job Cuts Amid Economic and Political Headwinds
The December PMI reported the steepest workforce reductions since January 2021, when Covid-19 furlough schemes temporarily eased catastrophic job losses. Official statistics last week revealed the UK economy contracted by 0.1% in October, underscoring the daunting task facing Prime Minister Keir Starmer to meet his pledge of making the UK the fastest-growing G7 economy.
Business leaders have voiced concerns over the £25 billion increase in employer national insurance contributions (NICs) announced in October’s budget. Critics argue that this policy, designed to repair public finances and fund public services, will stifle job creation, limit wage growth, and force price increases.
Andrew Griffith, Shadow Business Secretary, labeled the PMI findings “shocking,” stating: “This follows Labour’s jobs tax as sure as night follows day. The chancellor must listen to businesses, not just union paymasters, or working people will continue to suffer.”
Inflation and Interest Rate Challenges
The Bank of England faces a difficult balancing act, as rising employment costs and inflation create competing pressures. While businesses raising prices could fuel inflation, job cuts may increase slack in the labor market, potentially prompting future interest rate reductions.
Despite signs of cooling, the UK labor market remains resilient, with annual wage growth reaching historically high levels. Upcoming official figures are expected to confirm stable unemployment in the three months to October, with annual wage growth (excluding bonuses) projected to rise from 4.8% to 5%.
Thomas Pugh, an economist at RSM UK, highlighted the difficult situation: “This combination of weak growth and rising inflation creates a nightmare trade-off for the MPC. While high interest rates weigh on growth, the Bank also needs to address inflation. We expect no rate cuts on Thursday and only quarterly reductions next year.”
The Bank’s Monetary Policy Committee is expected to maintain interest rates at 4.75% this week, as it navigates the challenges posed by inflation, slow growth, and a shrinking labor market.
