(Bloomberg) -- UK businesses stepped up the pace of job cuts in February, according to a closely watched survey, boding ill for a labor market that has so far held up in the face of Chancellor of the Exchequer Rachel Reeves’ huge increase in payroll taxes.
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S&P Global said its key purchasing managers’ index was little changed at 50.5 versus 50.6 in January, just above the 50 threshold separating growth and contraction. Economists had expected no change. Private-sector companies, it said, faced a “stagflationary” backdrop and new work dried up.
The survey suggested that job cuts and price pressures intensified as firms prepare for a big increase in payroll costs in April. The fall in headcount was the sharpest since November 2020 and the worst since the financial crisis when excluding the pandemic.
The PMI has pointed to stagnation for four months, with the dominant services sector now barely growing and manufacturing in outright contraction.
Businesses are bracing for an upcoming £26 billion hike in payroll taxes and another sharp rise in the minimum wage, which threaten to hobble the government’s growth agenda. Firms could respond by firing workers, freezing pay, raising prices or taking the hit on profit margins.
Recent indicators suggest companies have so far been reluctant to let go of workers, fearing they may struggle to rehire again once the economy picks up. Employment rebounded in January, tax data show, and the number of people being put on notice for the axe is below levels seen a year ago.
The question is whether Britain is out of the woods, or whether rocketing redundancies are just around the corner.
“The lack of growth alongside rising price pressures points to a stagflationary environment which will present a growing dilemma for the Bank of England,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
What Bloomberg Economics Says...
“The February UK flash composite PMI survey continues to point to the worst of both worlds, with activity likely stalling in the first quarter, while inflationary pressures rise. That will force the Bank of England to act cautiously regarding easing policy. Still, a struggling economy should keep the central bank on an easing path. Our base case is that the BOE will continue to move in quarterly steps, delivering three more rate cuts this year.”