British factories reduced their workforce at the fastest rate in nearly five years last month, as the government’s payroll tax hike began to increase costs and both domestic and international demand remained weak, according to a survey released on Monday.

Despite this, manufacturers expressed the most optimism in six months, anticipating an economic recovery.

The S&P Global Purchasing Managers’ Index (PMI) for UK manufacturing stayed below the 50.0 mark, which separates growth from contraction, for the fifth consecutive month, dropping to a 14-month low of 46.9 in February. This was slightly above the preliminary estimate of 46.4 but lower than January’s 48.3.

The employment component of the PMI hit its lowest level since May 2020, during the early stages of the COVID-19 pandemic. Factories responded to rising social security costs by cutting temporary staff, reducing working hours, making redundancies, and not replacing departing employees.

The increase in National Insurance Contributions, announced by Finance Minister Rachel Reeves last October to fund public services and investment, takes effect on April 1. This date also marks a nearly 7% rise in the minimum wage.

Firms told S&P Global that suppliers were putting up their prices ahead of the change.

In turn, manufacturers increased their selling prices by the most since April 2023, S&P Global said.

Demand from outside Britain remained weak with new export orders falling by the most in a year.

However, the survey’s measure of business optimism rose to a six-month high in February, linked to investment spending, new business plans and hopes that economic conditions would strengthen.

Britain’s economy showed almost no growth in the second half of last year and the Bank of England last month halved its economic growth forecast for 2025 to just 0.75%.

“This combination of absent growth and rising prices will contribute to a growing dilemma for the Bank of England over the coming months,” Rob Dobson, Director at S&P Global Market Intelligence, said.

The final February PMI for Britain’s much larger services sector is due on Wednesday.

Other figures have painted a less bleak picture of the jobs market than the PMI surveys, at least so far. Data provided by employers to the tax authorities showed the number of employees unexpectedly climbed by 21,000 in January from December.

The BoE is watching the jobs market closely as it gauges whether inflation pressures remain too strong for it to speed up its gradual pace of interest rate cuts.

With inputs from agencies