UK firms are accelerating job cuts at a rate not seen since the financial crisis, barring the pandemic period, driven by escalating costs that have reignited fears of stagflation within the UK economy, reveals a key survey.
The S&P Global flash purchasing managers’ survey, released on Friday, indicates that the net share of businesses reducing their workforce in January and December reached its highest level since 2009, excluding the initial impact of Covid-19 in 2020.
This week, supermarket giant J Sainsbury announced the elimination of 3,000 positions, marking a significant reduction in jobs.
The findings pose a challenge to Chancellor Rachel Reeves, who has been promoting the UK’s economic prospects at the World Economic Forum in Davos.
Reeves is scheduled to outline her growth-enhancement strategies in a forthcoming speech.
Despite the concerning job cuts, the survey did provide some optimism, with the headline index, which measures overall activity in the private sector, climbing to a three-month peak of 50.9 in January from 50.4 in December.
Economists had anticipated a slight decline to 50 points. A reading above 50 suggests expansion, and businesses reported that new product introductions and effective marketing strategies contributed to the increase in activity.
However, the survey also highlighted that the cost pressures on businesses surged at the fastest rate since May 2023, leading many to pass these increased costs onto consumers. This resulted in the sharpest rise in average prices charged since July 2023.
Chris Williamson, an economist at S&P Global Market Intelligence, commented that the survey’s outcomes “add to the gloom surrounding the UK economy, with firms reducing headcount due to falling sales and a bleak business outlook.”
He also noted that these inflationary pressures could lead to a stagflationary scenario, presenting a complex policy challenge for the Bank of England.
The survey attributed the reduction in employment primarily to hiring freezes and a lack of replacement for voluntarily departing staff, amid escalating payroll expenses.
Additionally, many firms indicated that the Labour government’s decision to increase employers’ national insurance contributions, effective April, has curtailed recruitment plans. Some also mentioned a dip in business confidence following the budget announcement.
The Conservative Party has criticised Reeves’ fiscal policies, claiming her tax increases will harm job creation and growth, and that impending labour market reforms will further impact hiring.
Earlier this month, a Bank of England survey indicated that a significant percentage of businesses anticipated reduced employment and profit margins due to the upcoming increase in employers’ national insurance contributions, with over half expecting to raise their prices.
Consumer confidence has also taken a hit, with a survey by GfK showing a 5-point decline in January to the lowest level in over a year, amid concerns over job cuts and higher borrowing costs.
Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, noted that payroll tax hikes, global uncertainties, and tariff threats were driving inflation and economic output in opposing directions.
He mentioned that while economic growth was not weak enough to justify rapid rate cuts, inflation levels necessitated a cautious approach by the Monetary Policy Committee.
Elias Hilmer, an economist at Capital Economics, suggested that the PMI data would not ease the Bank of England’s concerns about weak economic activity, although the strengthening price pressures might lead to only gradual rate reductions in the future.
With the UK economy showing no growth in the three months to September, and similar expectations for the final quarter of 2024, the economic outlook remains cautious.
The Bank of England is predicted to reduce rates slightly to 4.5% in February, in line with market expectations.
