Britain’s labor market is facing its sharpest downturn in years, with more than 160,000 roles predicted to disappear by 2026 as anemic growth and stubbornly high debt combine to squeeze employers across the country’s industrial heartlands.
The grim assessment comes from Item Club, an independent forecaster that runs its forecasts on the same economic model used by the Treasury Department to assess government policy. According to its latest analysis, a total of 163,000 jobs will disappear this year, representing a 0.4 percent drop in total employment and a negative impact on workers who are already feeling the brunt of an 18-month recovery.
For Britain’s small and medium-sized employers, the report makes sobering reading. The pain, the Item Club warns, will fall disproportionately on energy producers, the construction trade and the high street, three sectors between which support tens of thousands of SMEs and the supply chains that surround them. As liquidity erodes, consumer-facing businesses in retail, hospitality and food services are expected to feel a second shock.
“This will be felt in low-income areas where consumers tend to save less when it rains, which will reduce spending in the retail and hospitality sectors,” said Tim Lyne, adviser to the Item Club, in an apparent assessment of how the downturn will play out beyond the M25.
The spatial pattern of compression will vary and, in places, be severe. The unemployment rate in Birmingham is predicted to rise from 6.7 per cent to 7.8 per cent within the year, while Glasgow will break through the 5 per cent mark from the 4.3 per cent average by 2025. Cambridge stands out from the rest of Britain’s big cities, where overall work is expected to improve with low knowledge.
Nationally, the unemployment rate, which rose to 5 percent at the end of last year, is headed for 5.1 percent in the coming months, up from 4.9 percent in the latest official figures published by the Bank of England.
Official growth data this week is expected to confirm that the economy grew by about 0.3 percent in the first quarter of 2026, a slight improvement on the 0.1 percent recorded in the last three months of 2025, but not the kind of momentum that creates large-scale jobs.
A separate survey from KPMG and the Recruitment and Employment Association reinforces the negative outlook. Permanent hiring across the economy fell in April at its fastest pace since the start of the year, while demand for temporary workers rose to the highest level since 2023, as employers hedged their bets on hiring commitments.
Neil Carberry, REC’s chief executive, said the trend reflects “the preference of temporary workers in certain companies looking to move forward with business development and expansion plans” against an uncertain background. “Businesses will be particularly concerned about the impact of inflation, their borrowing costs and any disruption to supply chains,” he added, referring to the aftermath of the conflict in Iran.
For business owners, the message is one that many will recognize from the past two years: keep options open, keep demographics in check, and assume that capital costs will remain higher than comfort for longer.
The Item Club expects the only meaningful employment growth for the year to come from the economy, education, health and public-sponsored social care sectors, but its analysts do not guarantee that this expansion “is unlikely to offset losses in the largest, most critical 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 interest rates are rising and inflation is feeding into layoffs and layoffs. With wage payments still running ahead of productivity gains, and energy contracts due for renewal at thousands of medium-sized industrial enterprises this summer, the path of least resistance for many owner-managers will be to cut wages instead of increasing them.
One silver lining is the gradual improvement in unemployment rates, as many people who left the workforce during and after the pandemic are now returning to look for work. But as vacancies dwindle and labor markets loosen, that new influx of job seekers may find conditions even more difficult than last year.
Item Club ratings, derived from the Treasury’s own model, are often used by policymakers to scrutinize the government’s claims about its economic agenda. In the event, they give ministers little political insurance and Britain’s job creators even less.
