UK private sector employment shrinks at fastest pace since 2021

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UK businesses are cutting headcount at the fastest rate since the pandemic, according to a closely watched survey highlighting the impact of Rachel Reeves’ tax rise budget.

Private sector employment in December fell more than for any month since January 2021, according to S&P Global’s preliminary UK Purchasing Managers Employment Index.

The index fell to 45.8, down from 48.9 in November. It was below the key 50 mark for the third month in a row and the lowest since 2009 if the pandemic is excluded.

Any reading below 50 indicates that most companies are reducing their workforce.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Firms are responding to rising national insurance contributions and new regulations around staffing with a sharp decline in hiring, prompting employment fell in December at the fastest rate since the global crisis. financial crisis of 2009 if the pandemic is excluded.”

In another setback for the UK chancellor, separate figures published on Monday indicated that manufacturers’ confidence in the economy also fell at the steepest rate since the pandemic in the last quarter.

In his autumn budget, which increased taxes by £40bn, Reeves announced a £25bn increase in employers’ national insurance contributions from April 2025.

Companies will start paying NIC on employee earnings from £5,000, instead of the current threshold of £9,100, and the rate will increase by 1.2 percentage points to 15 per cent.

Reeves, who has pledged to create the most “pro-growth” British Treasury, has defended the policy. But critics have accused it of damaging business confidence, and many companies have said the move will hurt hiring and could lead to higher prices.

Data released on Monday by trade group Make UK showed that the index tracking manufacturers’ confidence in the economy fell to 5.8 in the latest quarter from 6.8, the biggest quarter-on-quarter drop since spring 2020.

Official figures released last week showed the UK economy contracted 0.1 per cent for two consecutive months in October, pointing to a weak start to the final quarter after strong growth in the first half of this year.

Growth slowed to 0.1 percent in the three months to September from 0.5 percent in the previous three months, the Office for National Statistics said.

Monday’s PMI survey indicated that rising wages contributed to the biggest rise in input costs since April.

Average prices charged by private sector firms rose at the fastest pace in nine months, which will cause concern for Bank of England policymakers when they meet this week to vote on interest rates.

“The preliminary PMI for December shows that businesses will absorb the payroll tax increases in the October 30 budget by cutting hiring and raising prices. The latter will be a particular concern for the Monetary Policy Committee,” said Elliott Jordan-Doak, an economist at consulting firm Pantheon Macroeconomics.

Markets widely expect the Bank of England to keep interest rates at 4.75 percent on Thursday, following quarter-point cuts in November and August.

Andrew Bailey, governor of the Bank of England, told the Financial Times this month that
the response to higher NICs was “the biggest problem” after the Budget. “For us, it is an important criterion how companies balance the combination of prices, wages, employment levels and what is taken into account,” he added.

The PMI survey also showed that business activity expectations for the next 12 months sank to a two-year low in December, as companies weighed a tougher outlook for sales alongside rising costs, especially for staff.

Both the employment and expectations index are part of the overall PMI composite index, which was unchanged from November at 50.5. Williamson said the reading was indicative that the economy “more or less stagnated in the fourth quarter.”

However, he added that falling confidence and workforce cuts “suggest that the worst is yet to come as we approach the new year.”