Britain’s labour market is bracing for its sharpest contraction in years, with more than 160,000 roles forecast to vanish over the course of 2026 as anaemic growth and stubbornly high energy bills combine to squeeze employers across the country’s industrial heartlands.
The grim assessment comes from the Item Club, the independent forecaster that runs its projections through the very same economic model used by the Treasury to stress-test government policy. According to its latest analysis, a net 163,000 jobs will disappear this year, representing a 0.4 per cent decline in total employment and dealing a fresh blow to a workforce already feeling the strain of 18 months of cooling demand.
For Britain’s small and medium-sized employers, the report makes for sobering reading. The pain, the Item Club warns, will fall disproportionately on energy-intensive manufacturers, the construction trade and the high street, three sectors that between them prop up tens of thousands of SMEs and the supply chains that orbit them. As disposable incomes are eroded, consumer-facing businesses in retail, hospitality and food service are expected to feel a secondary shockwave.
“The hit will be felt in lower-income regions where consumers typically have less rainy-day savings, which will reduce spending in the retail and hospitality sectors,” said Tim Lyne, an adviser to the Item Club, in a candid assessment of how the downturn will play out beyond the M25.
The geographical pattern of the squeeze will be uneven and, in places, severe. Birmingham’s unemployment rate is forecast to climb from 6.7 per cent to 7.8 per cent over the year, while Glasgow is on course to break through the 5 per cent mark from a 4.3 per cent average in 2025. Cambridge stands as the lone exception among Britain’s major cities, with overall employment expected to edge modestly higher on the back of its knowledge-economy base.
Nationally, the jobless rate, which brushed 5 per cent at the close of last year, is heading for 5.1 per cent in the coming months, up from 4.9 per cent in the most recent official figures published by the Bank of England.
Official growth data due this week is expected to confirm that the economy expanded by around 0.3 per cent in the first quarter of 2026, a modest improvement on the 0.1 per cent recorded in the final three months of 2025, but hardly the kind of momentum that creates jobs at scale.
A separate survey from KPMG and the Recruitment and Employment Confederation lends weight to the gloomier outlook. Permanent placements across the economy fell in April at their fastest rate since the start of the year, while demand for temporary staff climbed to its highest level since 2023, as employers hedged their bets on hiring commitments.
Neil Carberry, chief executive of the REC, said the trend reflected a “preference for short-term staff at some firms who wanted to push ahead with business development and expansion plans” against an uncertain backdrop. “Businesses will be particularly concerned about the impact on inflation, their borrowing costs and any disruption to wider supply chains,” he added, alluding to the lingering aftershocks of the conflict in Iran.
For business owners, the message is one many will recognise from the past two years: keep options open, keep headcount flexible, and assume that the cost of capital will remain elevated for longer than is comfortable.
The Item Club expects the only meaningful employment growth this year to come from publicly funded corners of the economy, education, health and social care, but its analysts are blunt that this expansion is “unlikely to offset losses in larger, more demand-sensitive sectors”. In short: the state will hire, but it will not hire enough.
For SMEs, the most worrying signal in the report is the speed at which higher interest rates and elevated inflation feed through to recruitment freezes and redundancies. With wage settlements still running ahead of productivity gains, and with energy contracts due for renewal across thousands of mid-sized industrial businesses this summer, the path of least resistance for many owner-managers will be to thin payrolls rather than expand them.
One silver lining is the gradual improvement in economic inactivity rates, as more people who left the workforce during and after the pandemic are now returning to look for work. But with vacancies falling and the labour market loosening, that fresh supply of jobseekers may find conditions tougher than they were even a year ago.
The Item Club’s projections, drawn from the Treasury’s own model, are typically used by policymakers to scrutinise the government’s claims about its economic agenda. On this occasion, they offer ministers little political cover and Britain’s job creators even less.
Jamie Young
Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.
When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.
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