British factories cut jobs at the fastest rate in nearly five years in February, as the government’s payroll tax increase drove up costs and domestic and international demand remained weak, according to a survey released on Monday.
The S&P Global Purchasing Managers’ Index (PMI) for UK manufacturing fell to a 14-month low of 46.9, marking the fifth consecutive month below the 50.0 threshold that separates growth from contraction.
Manufacturing Sector Struggles as National Insurance Hike Looms
Despite the decline, manufacturers reported the most positive outlook in six months, hoping for an economic recovery. However, the PMI’s jobs measure dropped to its lowest level since May 2020, when the COVID-19 pandemic severely impacted employment.
Many factories responded to the rise in National Insurance Contributions, announced by Finance Minister Rachel Reeves last October, by laying off temporary workers, reducing hours, making redundancies, and not replacing departing employees. The tax increase takes effect on April 1, alongside a 7% rise in the minimum wage, further intensifying cost pressures on businesses.
Manufacturers Raise Prices as Supplier Costs Soar
The survey found that suppliers were already raising prices ahead of the tax changes, prompting manufacturers to increase their selling prices at the fastest rate since April 2023. Meanwhile, demand from overseas markets remained weak, with new export orders dropping at the sharpest rate in a year.
Economic Outlook: Cautious Optimism Despite Growth Concerns
While the UK economy stagnated in the second half of 2024, and the Bank of England (BoE) cut its 2025 growth forecast to just 0.75%, business optimism within the manufacturing sector reached a six-month high in February. Companies cited investment spending, new business strategies, and expectations of stronger economic conditions as reasons for their renewed confidence.
Rob Dobson, Director at S&P Global Market Intelligence, warned that rising costs amid slow economic growth could create challenges for the Bank of England in the coming months.
The final PMI report for the UK’s services sector—a larger contributor to the economy—is set for release on Wednesday.
Despite the weak PMI data, broader employment figures have been more positive. Official data showed payroll employment unexpectedly increased by 21,000 in January, suggesting some resilience in the job market.
As the Bank of England closely monitors the labor market and inflation trends, businesses will be looking for further signals on potential interest rate adjustments in the coming months.
