British businesses have reduced staff numbers at the fastest rate in nearly four years, with rising prices and increased pessimism about the economic outlook attributed largely to recent tax hikes by the new government.
The preliminary S&P Global Flash Composite Purchasing Managers' Index (PMI) for December remained at 50.5, just above the no-change mark of 50.0, but fell short of economists' expectations of 50.7. Manufacturing activity dropped to its lowest level in 11 months at 47.3, while the services sector saw a slight improvement to 51.4 from 50.8.
Employment across both sectors contracted significantly, marking the steepest decline since January 2021, during the COVID pandemic. S&P Global Market Intelligence's chief business economist, Chris Williamson, commented on the grim situation, noting that businesses are facing a combination of stalled economic growth, declining employment, and rising inflation.
Finance Minister Rachel Reeves' budget announcement on October 30 introduced higher social security contributions, contributing to a negative sentiment among businesses. Many companies opted not to replace departing staff, resulting in the sharpest employment drop since the global financial crisis of 2009, excluding the pandemic period. Some firms have also reduced working hours and implemented planned restructurings.
Additional surveys indicate a decrease in hiring intentions following the budget, with official data showing economic contraction in both September and October, marking the first consecutive monthly declines since early in the pandemic.
The PMI suggests a stalling economy in the final quarter of 2024, with potential further declines expected in early 2025. The Bank of England may be cautious about interest rate cuts due to signs of rising inflation, which could exacerbate economic downturn risks in 2025.
Prices charged by firms increased at the fastest rate in nine months, driven by higher input costs, including wages. New orders fell for the first time in over a year, particularly in manufacturing, where demand from other European clients weakened. Expectations for the upcoming year are the lowest since December 2022.
The Bank of England is anticipated to maintain current interest rates during its December meeting, with investors keenly observing any indications of concern regarding the labor market downturn, which could influence expectations for quicker rate reductions.