UK businesses are reducing staff numbers at the fastest rate since February, according to new data, as higher payroll taxes and uncertainty over US tariffs put increasing pressure on company costs and consumer demand.
The flash S&P Global purchasing managers’ index (PMI) for July showed a further slowdown in economic momentum, with fresh orders falling, export sales contracting, and employers citing the need to cut headcounts due to rising costs and subdued demand.
“Survey respondents widely commented on the need to reduce headcounts in response to higher payroll costs and subdued customer demand,” the report noted.
The PMI, a key indicator of private sector health, fell from 52 to 51 in July, signalling continued but weakening growth. A figure above 50 suggests expansion, while anything below indicates contraction. Most of the decline came from the services sector, which fell from 52.8 to 51.2, while manufacturing output ticked up slightly to 50.
The survey findings are likely to intensify pressure on the Bank of England, which is widely expected to cut interest rates from 4.25% to 4% at its next meeting in a fortnight in an effort to lift an economy showing signs of stagnation.
Businesses reported that the combination of extra employment taxes introduced in the last budget and growing fears over President Trump’s escalating tariff regime had dampened both demand and business confidence.
According to official figures, the UK economy contracted in April and May, while unemployment rose to 4.7% in May, the highest in four years. Wage growth has now slowed for three consecutive months.
“Higher payroll taxes and a chunky rise in the national living wage back in April are exerting more significant downward pressure on staffing numbers,” said James Smith, an economist at ING. “At the same time, these policy changes appear to be keeping upward pressure on prices.”
Inflation remains stubbornly above the Bank’s 2% target, currently running at 3.4%, and is unlikely to fall significantly before 2026, according to the Bank’s own forecasts.
Smith also noted that inflation was proving particularly persistent in areas such as food and hospitality, driven in part by increased staffing costs and sector-specific wage pressure.
The PMI report also highlighted that export sales declined for the ninth consecutive month, though the rate of decline has slowed slightly. Firms blamed continued uncertainty over US tariffs, as well as heightened competition from Chinese exporters who have been shut out of the US market and are now targeting Europe more aggressively.
Despite the short-term gloom, businesses reported a relatively optimistic outlook for the next 12 months. Many expect interest rates to fall, easing borrowing costs, while a build-up of household savings could fuel a rebound in consumer spending.
“Output growth weakened to a pace indicative of the economy growing at a mere 0.1% quarterly rate, with risks tilted to the downside,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
As the UK moves into the second half of the year, the data suggests an economy struggling for momentum, with weakening domestic demand, global trade tensions, and stubborn inflation creating a complex challenge for both policymakers and businesses.
