British factories cut staff at the fastest pace in nearly five years last month as the government’s payroll tax increase began to push up their costs and demand at home and abroad was weak, a survey showed on Monday.
But manufacturers also turned the most positive in six months as they hoped for a pick-up in the economy.
The S&P Global Purchasing Managers’ Index for UK manufacturing remained below the 50.0 threshold that divides growth from contraction for a fifth month in a row, sinking to a 14-month low of 46.9 in February.
That was above a preliminary estimate for February of 46.4 but below January’s 48.3.
The PMI’s jobs measure fell to its lowest since May 2020 – early in the COVID-19 pandemic – with factories responding to a rise in their social security contributions bill by laying off temporary staff, reducing the working hours of some employees, making redundancies and not replacing leavers.
The rise in National Insurance Contributions – announced by finance minister Rachel Reeves last October to help pay for more public services and investment – takes effect on April 1. That is also the date for a nearly 7% increase in the minimum wage.
Firms told S&P Global that suppliers were putting up their prices ahead of the change.
In turn, manufacturers increased their selling prices by the most since April 2023, S&P Global said.
Demand from outside Britain remained weak with new export orders falling by the most in a year.
However, the survey’s measure of business optimism rose to a six-month high in February, linked to investment spending, new business plans and hopes that economic conditions would strengthen.
Britain’s economy showed almost no growth in the second half of last year and the Bank of England last month halved its economic growth forecast for 2025 to just 0.75%.
“This combination of absent growth and rising prices will contribute to a growing dilemma for the Bank of England over the coming months,” Rob Dobson, Director at S&P Global Market Intelligence, said.
The final February PMI for Britain’s much larger services sector is due on Wednesday.
Other figures have painted a less bleak picture of the jobs market than the PMI surveys, at least so far. Data provided by employers to the tax authorities showed the number of employees unexpectedly climbed by 21,000 in January from December.
The BoE is watching the jobs market closely as it gauges whether inflation pressures remain too strong for it to speed up its gradual pace of interest rate cuts.
(Writing by William Schomberg; Editing by Christina Fincher)
