British manufacturers slashed jobs at the sharpest pace in nearly five years last month as rising payroll taxes and sluggish demand weighed on the sector, according to a survey

released on Monday.

Despite the cutbacks, business confidence among manufacturers reached its highest level in six months, fueled by hopes of an economic recovery.

The S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) remained below the crucial 50.0 mark—separating growth from contraction—for the fifth consecutive month. February’s reading dropped to 46.9, marking a 14-month low. While this was slightly better than the preliminary estimate of 46.4, it was still lower than January’s 48.3.

Employment in the sector took a significant hit, with the PMI’s job index sinking to its lowest level since May 2020, a time when the COVID-19 pandemic severely disrupted business activity. The decline came as manufacturers reacted to a rise in National Insurance Contributions by cutting temporary staff, reducing hours, implementing redundancies, and leaving vacant positions unfilled.

The payroll tax hike—announced by Finance Minister Rachel Reeves last October to support public services and investment—is set to take effect on April 1, coinciding with a nearly 7% increase in the minimum wage. According to the survey, suppliers have already started raising prices in anticipation of the change, prompting manufacturers to increase their selling prices at the fastest pace since April 2023.

Weak external demand added to the sector’s struggles, with new export orders falling at the steepest rate in a year.

However, there was a silver lining. Business optimism climbed to its highest level in six months, driven by plans for investment, new business opportunities, and expectations of improving economic conditions.

The broader UK economy showed minimal growth in the latter half of 2024, and the Bank of England recently cut its 2025 growth forecast to just 0.75%.

“This mix of stagnant growth and rising prices presents a growing challenge for the Bank of England in the coming months,” said Rob Dobson, Director at S&P Global Market Intelligence.

The final PMI data for the UK’s much larger services sector is set to be released on Wednesday.

Meanwhile, other labor market indicators have provided a somewhat more positive outlook. Data from tax authorities showed that the number of employees in the UK unexpectedly rose by 21,000 in January compared to December.

The Bank of England continues to monitor the labor market closely as it assesses whether inflationary pressures are still too strong to justify a quicker pace of interest rate cuts. Photo by John Haig, Wikimedia commons.