Economists bracing for GDP slowdown as businesses vulnerable to 'perfect storm of challenges'

The seams are starting to fray in Britain’s labour market. Unemployment and jobless benefit claims were both up in May, job vacancies have fallen to four year lows and wage growth is slowing, though it remains elevated. We have also seen an alarming drop in payrolled employees, which fell by an eye-watering 109k in May alone - the largest monthly decline outside of the pandemic since records began in 2014.

Worse may yet be on the way, with British firms in the midst of the perfect storm of challenges, and forced to hold off on hiring and increase layoffs after April's hike to employer National Insurance contributions and the minimum wage.

Small and medium-sized businesses are particularly vulnerable, with risks compounded by intense global trade uncertainty and the spectre of further Labour tax hikes in the autumn.

Sterling sold off across the board following the release of the data on Tuesday, as markets swiftly priced in a more aggressive pace of cuts from the Bank of England (swaps now see a more than 70% chance of an August cut and 50bps of lower rates by year-end).

The challenge for the MPC is that they now have to juggle a weakening jobs market on the one hand, with rising inflation pressures on the other.

A June hold still appears a near certainty, but there is now a big risk that the MPC drops its hawkish bias.

April GDP data on Thursday will be closely watched in this regard, with economists bracing for a modest contraction.

In the meantime, Chancellor Reeves will be providing details of the government’s spending review, including department budgets. We don’t, however, expect this to be a major story for financial markets.