Hiring freezes on horizon as UK economy set to shrink in 2023

UK employers are looking at a range of cost-cutting measures due to continued economic uncertainty.

A quarter of UK employers (26%) said they are planning to freeze all hiring in 2023, and a further 27% reported significant cuts to their recruitment budget, according to a survey of 300 employers by jobs platform Indeed Flex.

Uncertainty over business revenue also prompted a fifth (20%) to say they would not be raising staff wages.

The findings follow the International Monetary Fund's (IMF) announcement that it expected the UK economy to contract by 0.6% in 2023; a sharp downwards revision of 0.9% from its October estimate. It was also the only G7 country not forecast for growth this year.

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Novo Constare, CEO and co-founder of Indeed Flex, told HR magazine inflation had hit business hard.

He said: “Companies are feeling the cost of living crisis every bit as acutely as consumers. Whether they’re wrestling with soaring supplier costs or rising wage demands from their staff, the inflationary pressure is taking its toll on every firms' bottom line.

“When you add in the weakness of the economy and doom-laden forecasts like that of the IMF, it’s easy to see why business sentiment is so fragile. Against this backdrop many employers are keen to rein in staff costs, both in terms of making new hires and with pay rises for existing staff.”

Duncan Brown, principal associate at the Institute for Employment Studies, said hiring freezes indicated a shift in direction in the employment market.

Poor performance in the economy would make it harder for companies to pick up the cash to pay their employees, especially for knowledge-based employers where staff costs may make up 70% of total expenditure, he said.

"But," he told HR magazine, “it's far too early to say that pay increases are on the way back down.”

Brown added that labour shortages had complicated the relationship between economic growth and pay rises, and that the two rarely aligned perfectly under normal circumstances, in any case. 

"Normally a downturn does depress pay awards. But the difference this time is the very tight labour market due to higher economic inactivity, skills shortages, Brexit and other factors, which are still pushing up recruitment salaries," he said.

“I think the 20% not planning on increasing pay may be wishful thinking; I seem to recall [Indeed Flex's] equivalent survey last year expressed similar unfulfilled hopes,” he added.

Initial analyses of XpertHR's January pay awards, he said, seemed to show a median pay award of 6% in the UK, with an interquartile range of 3.5-7%.

"Whilst it is too early to know if this trend will continue, the current indications are that actual pay awards are slightly above the 5% median predictions [from research organisation Incomes Data Research]."

Brown said: “It looks like, with a much milder economic contraction now forecast and possibly not a recession this year, plateauing rather than declining pay awards is the more likely outcome.

“Unemployment has started to increase marginally but at 3.7% is still very low by historical standards. So firms are still facing intense recruitment and retention pressures, whatever their economic state.”