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Employers slash staff levels in anticipation of higher costs while inflation and Trump’s tariffs cast long shadows.
London—A Fragile Labour Market on the Edge
Britain’s employers trimmed headcounts sharply in March, slashing 78,000 jobs—the biggest drop since the early pandemic—just weeks before Finance Minister Rachel Reeves’ tax hike on employers came into force.
While the unemployment rate held steady at 4.4%, other metrics revealed a cooling jobs market, raising red flags for the Bank of England (BoE), which faces growing pressure to cut interest rates as early as May.
This fragile employment outlook now collides with two powerful forces:
- Rising employer tax burdens under the new Labour government
- U.S. trade tariffs from President Trump that threaten to choke UK exports and global demand
Together, these dynamics may tip the UK into a slow-bleed recession unless central banks intervene quickly.
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A Labour Market Losing Steam
Job Cuts: 78,000 payroll employees lost in March—the steepest decline since 2020
Vacancies: Fell below pre-pandemic levels for the first time since 2021
Wage Growth: Earnings (ex-bonuses) up 5.9% YoY, still high but expected to cool
Interest Rate Outlook: Markets pricing in >90% chance of BoE rate cut on May 8
“The big picture,” says Sanjay Raja, Chief UK Economist at Deutsche Bank, “is that the Monetary Policy Committee now has the green light to cut rates.” The reason? “Slack in the labour market is emerging, and trade uncertainty remains rife.”
A Tax Hike Amid a Hiring Freeze
At the heart of the hiring slowdown lies Reeves’ April increase in employer National Insurance contributions—a bold move aimed at boosting public revenues but one that’s already reshaping business behavior.
Yael Selfin, Chief Economist at KPMG UK, noted:
“The rise in labour costs is likely to put downward pressure on wage growth and hiring plans in the coming months.”
Compounding the issue, the government also raised the national minimum wage by nearly 7%, which—while easing pressure on low-income households—adds to employers’ cost burdens, especially in labour-intensive sectors like hospitality and retail.
Tariff Shock: Trump’s Economic Echo Hits the UK
Beyond domestic policy, Britain’s economic outlook is also being shadowed by Trump’s escalating tariff regime, targeting Chinese imports and potentially spreading to Europe. The result? Supply chain volatility, export slowdowns, and inflation importation.
Even without direct UK-targeted tariffs, the ripple effects could be significant. Slower global growth and higher input costs may weigh on UK output and employment, just as British businesses absorb higher payroll taxes.
BoE’s Dilemma: Inflation Still Sticky
The BoE is caught in a crosswind. On the one hand, slowing job growth and falling vacancies argue for rate cuts. On the other, wage inflation and sticky consumer prices point in the opposite direction.
Forecasts suggest inflation will dip to 2.7% in March, down from 2.8% in February—still well above the central bank’s 2% target. The BoE has warned inflation may rebound to nearly 4% by year-end, largely due to energy volatility and supply chain friction from global tariffs.
Reality Check: Is Unemployment Higher Than It Looks?
Official figures show the jobless rate at 4.4%, but economists remain skeptical.
“The true unemployment rate may already be closer to 4.8% or 4.9%,” said Gabriella Dickens, G7 economist at AXA Investment Managers.
The ONS has acknowledged issues with its survey methodology, casting further doubt on the reliability of the headline unemployment rate and making policymaking even trickier.
A Soft Landing or a Stumble?
The UK is standing at a precarious intersection: domestic fiscal tightening, global trade shocks, and a tightrope monetary policy challenge. The March labour data sends a strong signal that the economy may be softening faster than expected.
Investors and businesses are now betting on a May 8 BoE rate cut—a move that could offer short-term relief, but may not be enough to offset structural headwinds unless paired with targeted fiscal support.
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