UK Firms Slash Jobs Amidst Looming Tax Hike

British businesses are shedding jobs at the fastest rate in over four years as they brace for a significant tax increase announced by Chancellor Rachel Reeves, as reported by Reuters, citing a survey released Friday.

The preliminary reading of the UK S&P Composite Purchasing Managers' Index (PMI) for February dipped slightly to 50.5 from 50.6 in January, remaining just above the 50 level that indicates expansion. However, employment saw a sharper decline, falling to 43.5 from 45.3, reaching its lowest point since November 2020 and its lowest level since the 2007-08 financial crisis, excluding the COVID pandemic period.

"One in three companies reporting lower staffing levels directly linked the reduction to policies announced in last October's budget," stated Chris Williamson, chief business economist at S&P Global Market Intelligence.

Reeves' first annual tax and spending statement, following the Labour Party's victory in July, included a hike in social security contributions paid by businesses by £25 billion. This move has drawn criticism from employers who warn of potential job losses.

Williamson described the survey's findings as indicating a "stagflationary environment" characterized by slow growth and persistent inflationary pressures. This presents a complex challenge for the Bank of England, which recently lowered interest rates for the third time since August. However, the bank has indicated a cautious approach to future cuts, pending a clearer picture of whether weak growth will translate into cooling inflation and labor market pressures.

The survey revealed a significant increase in costs paid by firms, the highest in nearly two years. Some suppliers have already raised prices in anticipation of the upcoming tax increase in April and the near 7% increase in the minimum wage. Prices charged by firms also rose, nearing January's 18-month record high.

S&P Global reported that the UK's dominant services sector saw a slight uptick to 51.1 from January's 50.8. However, manufacturing contracted to a 14-month low of 46.4, with global uncertainty adding to concerns about the UK's economic outlook. Factory export orders, facing potential headwinds from US tariffs, also saw their sharpest decline in a year.

Several firms told S&P Global they were accelerating automation efforts in response to the escalating payroll costs and weak demand.