Employers across the United Kingdom are increasingly prioritising rigorous cost management strategies over initiatives aimed at growth, a direct consequence of escalating business costs and persistent global uncertainty that continue to dampen overall confidence. This pivotal finding emerges from the latest Labour Market Outlook published by the Chartered Institute of Personnel and Development (CIPD), an extensive survey encompassing more than 2,000 UK employers. Against a backdrop of continued economic and geopolitical volatility, the CIPD is strongly advocating for organisations to concentrate their efforts on factors within their immediate control, such as strategic workforce planning, targeted skills development programmes, and the judicious, effective integration of artificial intelligence (AI) to enhance productivity.
The Economic Imperative: A Shift Towards Fiscal Prudence
The comprehensive CIPD survey, conducted between late March and late April 2026, revealed that cost management has become the overwhelming primary focus for organisations, irrespective of their sector or size. A significant 58% of employers explicitly identified cost control as their paramount priority. This heightened emphasis is driven by a confluence of factors, including the projected rise in energy, raw material, and supplier costs, which are anticipated to compound already elevated employment expenses. For context, the UK economy has navigated a period of sustained inflationary pressure for over two years, with consumer price index (CPI) inflation peaking in late 2022 and remaining stubbornly above the Bank of England’s 2% target throughout much of 2024 and 2025. This has led to increased input costs across virtually every supply chain, from manufacturing to services. Businesses have absorbed these shocks, often passing some costs onto consumers, but are now reaching a critical juncture where further price increases are challenging in a competitive market.
Improving productivity emerged as the second most significant priority, cited by 44% of respondents. This figure rose sharply to 55% among large private sector employers, underscoring a strategic shift towards optimising internal efficiencies to mitigate external cost pressures. Growing market share, traditionally a key business objective, ranked third at 35%, a clear indicator of the cautious stance many businesses are adopting in the face of ongoing uncertainty. For large firms within the private sector, intentions to grow market share increased slightly to 47%, suggesting that while caution prevails, some larger entities retain a capacity for strategic expansion.
Chronology of Economic Pressures Leading to Current Outlook
The current conservative approach taken by UK employers is not an isolated phenomenon but rather the culmination of several years of compounding economic pressures. Following the initial shock of the COVID-19 pandemic in 2020, the global economy experienced a period of unprecedented supply chain disruptions. This was exacerbated by Russia’s invasion of Ukraine in early 2022, which sent energy and commodity prices soaring, particularly impacting European markets. The UK, already grappling with post-Brexit trade adjustments and labour market shifts, found itself in a particularly vulnerable position.
- 2020-2021: Initial pandemic lockdowns lead to unprecedented economic contraction, followed by rapid recovery fuelled by government stimulus. Supply chain bottlenecks begin to emerge as demand rebounds unevenly.
- 2022: Energy crisis intensifies following geopolitical events, pushing wholesale gas and electricity prices to record highs. Inflationary pressures broaden beyond energy to food and other goods. The Bank of England commences a series of interest rate hikes to curb inflation, impacting borrowing costs for businesses.
- 2023: High inflation persists, eroding consumer purchasing power and increasing operational costs for businesses. The government introduces various support schemes, such as the Energy Bill Relief Scheme, but these are temporary, and businesses anticipate their cessation will further expose them to market rates. The tight labour market, characterised by low unemployment and high vacancy rates, contributes to wage inflation pressures.
- 2024: Economic growth remains sluggish. Businesses continue to grapple with elevated input costs and higher interest rates. Discussions around the "sticky" nature of inflation become prevalent.
- 2025: The Employment Rights Act 2025 is enacted, introducing new compliance requirements and enhanced worker protections, potentially adding to administrative burdens and employment costs for businesses, particularly SMEs. Economic forecasts suggest a gradual easing of inflation, but persistent geopolitical tensions maintain uncertainty.
- Early 2026 (Survey Period): Employers, having navigated several years of volatility, are now primarily focused on solidifying their financial footing, anticipating further cost increases, and seeking stability. The CIPD survey captures this sentiment, reflecting a reactive strategy to a prolonged period of economic instability.
Employer Confidence and Labour Market Dynamics
The survey’s findings on employer confidence underscore the challenging environment. Confidence levels remain close to record lows, a stark contrast to periods of robust economic growth. The net employment balance – the critical metric representing the difference between employers expecting an increase versus a decrease in staff levels over the next three months – remains subdued at a modest +10. This figure, while positive, indicates a significantly slower pace of anticipated hiring compared to pre-pandemic or recovery periods, where balances often exceeded +20 or +30.
Hiring confidence exhibits notable sectoral disparities. It is strongest among employers in professional services, including legal and accounting firms (+25), the information technology (IT) sector (+20), and manufacturing (+19). These sectors often benefit from ongoing demand for digital transformation, regulatory compliance, and efforts to strengthen domestic supply chains, or are less exposed to immediate consumer discretionary spending cuts. Conversely, hiring confidence is weakest in public sector-dependent areas: compulsory education (-10), public administration and other public sector organisations (-9), and non-compulsory education (-5). This negative sentiment reflects sustained budget constraints, recruitment freezes, and ongoing restructuring efforts within the public sector.
Despite the overall cautious outlook, there is a glimmer of positive news regarding recruitment intentions. The proportion of employers planning to recruit in the next three months has seen a slight uptick, rising from 60% in the previous quarter to 63% in the current period. This marginal increase is largely propelled by stronger hiring intentions within the public sector, which remarkably increased from 70% to 77%. This public sector surge could be attributed to efforts to address long-standing staffing shortages in critical areas such as healthcare and social care, or to meet specific government targets. However, this increased recruitment ambition is tempered by the expectation of redundancies, with more than one in five employers (22%) anticipating job cuts in the next three months. This figure rises to a concerning quarter of public sector employers (26%), further highlighting the significant pressures on public services.
The Employment Rights Act 2025 and Regulatory Compliance
The introduction of the Employment Rights Act 2025 brought significant new rights for workers and, consequently, new compliance requirements for employers. These rights, intended to enhance worker protections and modernise labour laws, include provisions such as strengthened flexible working requests, expanded family-friendly leave, and greater clarity on worker status. While crucial for a fair labour market, their implementation demands careful attention from businesses.
However, the CIPD survey reveals a concerning disparity in how organisations are prioritising this new legislation. Only 20% of Small and Medium-sized Enterprises (SMEs) identify regulatory compliance with the Act as a key organisational priority. This contrasts sharply with almost a third of larger firms (32%) that place a high priority on compliance. This gap is particularly worrying given that SMEs form the backbone of the UK economy, employing a significant portion of the workforce. The CIPD is therefore calling upon the government to ensure that SMEs have readily accessible, clear information, practical guidance, and the necessary support to navigate and comply with the intricacies of this new legislation. Without adequate support, there is a risk that SMEs could inadvertently fall foul of the new regulations, leading to potential legal challenges, reputational damage, and increased operational costs.
Official Responses and Calls to Action
James Cockett, senior labour market economist at the CIPD and the lead author of the report, articulated the core message: "Our survey finds that organisations are prioritising cost management above growth and productivity ambitions, reflecting the cautious approach many businesses are taking in response to sustained increases in labour, energy, and wider operating costs, with further increases expected this year." He emphasised the need for external support, stating, "With employer confidence remaining low, it’s vital that government creates the right conditions employers need to invest, grow, and plan for the future. Targeted support for skills and workforce development and guidance to help employers comply with new measures in the Employment Rights Act will be crucial."
Cockett also urged businesses to focus on internal levers: "With so much happening externally, organisations should focus on the areas they can directly influence. This means taking a proactive approach to workforce planning and ensuring investment in technologies such as AI is supported by the right mix of people, skills, and systems to deliver meaningful productivity gains."
Responding to the CIPD’s findings, a spokesperson for the Department for Business and Trade stated, "The government understands the challenges businesses face and remains committed to fostering an environment where enterprises can thrive. We continue to implement policies designed to reduce inflation, support investment, and boost skills. Initiatives such as the Help to Grow scheme and apprenticeships are actively assisting businesses, and we are working closely with industry bodies to ensure clear guidance on new legislation like the Employment Rights Act 2025 is readily available, particularly for our vital SME sector."
Industry bodies echoed the CIPD’s concerns. A representative from the Confederation of British Industry (CBI) commented, "These findings reinforce what many businesses are experiencing on the ground. The cumulative effect of high inflation, interest rates, and regulatory changes is forcing a defensive posture. We urge the government to consider further measures to alleviate the burden on businesses, including reviewing the tax burden and providing incentives for capital investment, which is crucial for long-term productivity growth."
Meanwhile, trade unions highlighted the impact on workers. A spokesperson for the Trades Union Congress (TUC) remarked, "While businesses grapple with costs, workers are facing a real-terms pay squeeze that has persisted for far too long. The 3% median pay rise, against expected inflation, means many families will continue to struggle. It’s imperative that employers and government work together to ensure fair wages and robust protections under the Employment Rights Act, ensuring workers are not left behind in the pursuit of economic stability."
Pay and Persistent Skills Mismatches
Despite the ongoing cost pressures and the need for productivity improvements, median expected basic pay increases for the next 12 months have remained stubbornly at 3% for the eighth consecutive quarter. With inflation still a significant factor, and expected to rise in the coming period (e.g., Bank of England forecasts for 2026 often placed inflation around 2.5-3.0%, but with upside risks), many employees are likely to feel financially worse off in real terms. This prolonged stagnation in real wages can impact morale, exacerbate recruitment challenges, and potentially lead to increased industrial action. While the median pay award has remained unchanged for two years, the distribution of planned pay awards has narrowed around the 3% mark, indicating less variation and a more uniform, conservative approach to wage setting across industries.
In a slightly more encouraging development, fewer employers anticipate major difficulties filling roles in the next six months. About one in eight (12%) expect significant problems filling vacancies, a decrease from 15% a year ago. This modest improvement could be due to a slight cooling of the labour market or businesses adapting their recruitment strategies. However, the underlying issue of skills mismatches persists, with a substantial third (33%) of employers still reporting hard-to-fill roles. These roles are often concentrated in highly skilled areas such as digital technology, engineering, healthcare, and certain skilled trades, highlighting structural deficiencies in the education and training pipeline. This ongoing skills gap remains a critical drag on productivity and an impediment to business growth, reinforcing the CIPD’s call for sustained investment in skills development.
Broader Impact and Implications
The collective sentiment captured by the CIPD report signals a period of economic retrenchment for many UK businesses. The shift from growth to cost management suggests a potential slowdown in investment, innovation, and job creation, which could have broader implications for the UK’s overall Gross Domestic Product (GDP) growth. If businesses defer capital expenditure and focus solely on operational efficiencies, long-term productivity gains may be hampered, perpetuating the UK’s long-standing productivity challenge.
The disparities across sectors also point to a multi-speed economy, where resilience and growth opportunities are unevenly distributed. Sectors like IT and professional services, often less reliant on physical resources and more adaptable to remote work, may continue to outperform, while traditional industries or public services face more profound structural challenges.
The emphasis on AI integration, while a positive step towards productivity, also carries implications. It necessitates significant investment in both technology and, crucially, in human capital through upskilling and reskilling initiatives to ensure the workforce can effectively leverage new tools. Without this parallel investment in people, the full potential of AI risks being unrealised, or worse, could exacerbate existing skills gaps and create new forms of digital exclusion.
Finally, the lukewarm approach of SMEs to regulatory compliance with the Employment Rights Act 2025 poses a risk to both individual workers and the broader economy. Non-compliance, even unintentional, can undermine worker trust, lead to legal disputes, and create an uneven playing field. Robust government support and accessible resources will be paramount to ensure that the legislative intent of worker protection is fully realised without unduly burdening the businesses crucial for economic recovery and stability. The report paints a picture of an economy at a crossroads, where strategic policy interventions and proactive business leadership are vital to navigate current headwinds and build a foundation for future prosperity.
