Recruiters have skyrocketed in the post-Covid job boom… but if they start shedding their own staff, will they be in trouble?

Since the late days of the pandemic, UK recruitment firms have enjoyed something of a golden age.

Labor shortages and fierce competition for talent meant companies around the world were aggressively recruiting and offering record raises to attract employees.

The recruiting firms that helped them take a big hit – and many of them have since reported record results.

This allowed them to increase their own headcount after drastically reducing it at the height of the coronavirus lockdown, when so many companies were shedding staff to cut costs.

In recent months, however, many headhunters have started to reduce their headcount again as economic uncertainty has caused the job market to weaken.

Boom Times: Recruiters have benefited greatly over the past two years from labor shortages and fierce competition for talent that prompted companies to offer record raises

Robert Walters cut 120 jobs in the second quarter of 2023while PageGroup cut 450 jobs between January and June, equivalent to 5 percent of its workforce.

Is this the start of a turnaround in the UK recruitment sector – and what does that mean for its investment prospects?

What has caused the slowdown in the labor market?

Inflation has risen significantly over the past 18 months due to factors such as the recovery in economic activity following the pandemic and higher fuel and food costs due to increased gas prices and the war in Ukraine.

In response, central banks have raised interest rates to dampen the rise in prices. While this has been somewhat successful, it has come at the expense of slowing GDP growth and rising borrowing costs.

More and more companies reacted by reducing their investments, hiring new staff or even reducing their overall headcount.

According to Layoffs.fyi, technology developers have been at the forefront of these cuts, announcing around 228,000 job losses this year alone through mid-August, on top of the 165,000 losses in 2022.

Banking giants are also downsizing as mergers and acquisitions slow, with Barclays and Goldman Sachs holding two prominent names.

How many jobs have been eliminated in the recruitment industry?

It is difficult to obtain monthly data on total recruitment employment in the UK, so determining the broader scale of the downsizing is a challenge.

But most of the major London-listed recruiters are cutting headcounts, including Hays, which reduced its consultant headcount last quarter after a 3 percent fall in fee income.

Sectors conducting mass layoffs will have knock-on effects for industry-specific recruiters, such as tech-focused Parity Group, which announced job cuts in early August after warning of a 10 percent drop in sales.

Gloomier times: More and more companies have responded to rising inflation and interest rates by reducing their investments, hiring new employees or even reducing their overall headcount

However, not all recruiters are sending P45s en masse. The science, technology and engineering specialist SThree even announced a 5 percent increase in average headcount in its half-year results.

“There are very real sectoral differences in the recruiting firms they serve and that’s why we’re seeing different hiring and firing schedules across the recruiting market,” said Kate Shoesmith, deputy CEO of the Recruitment and Employment Confederation.

She told This is Money that many recruiters are focused on diversifying their offerings, whether through international expansion or entering new markets, before considering downsizing.

Temporary recruiters remain resilient

The financial performance of British headhunters is usually heavily dependent on the development of the global economy.

During the 2008–2009 global financial crisis and pandemic, jobs were cut significantly as unemployment skyrocketed and wage bills were cut.

Businesses that rely heavily on hiring full-time workers are particularly at risk, but not necessarily those that focus on hiring people on a temporary basis.

Timo Lehne, Managing Director of SThree, says the increasing demand for fixed-term contracts makes his company well-placed to provide workers for the technology, life sciences and engineering sectors.

“For our company, contract employment provides a more predictable and visible revenue stream and greater value over the life of the engagement,” he says.

Don’t Hire: Recruiters who rely on finding full-time employees are fairly vulnerable to economic downturns, but not necessarily those who focus on getting people into temporary jobs

In the first half of the fiscal year, the group reported just a 2 percent decline in net fees, as rising contract revenue largely offset a 19 percent decline in ongoing fees.

Staffline is also defying the bleaker outlook for the recruitment industry. The Nottingham-based company provides workers for some of the country’s largest supermarkets, such as Tesco and Sainsbury’s, and for industries ranging from manufacturing to logistics and food packaging.

Daniel Quint, the company’s Chief Financial Officer, said: “While hours worked are definitely below trend and overall productivity is weaker, our client fulfillment goals still require a level of recruitment support that does not change significantly from year to year. “

“This is in contrast to the more cyclical recruiters … who manage their workforce more aggressively through the ups and downs of the cycle.”

Are headhunters a good investment?

Leading London-listed recruiters – PageGroup, Robert Walters, Hays and SThree – struggled early in the pandemic as myriad industries, from airlines to leisure and hospitality, were devastated by lockdown rules.

The rebound in stocks began in late 2020 as hopes of a vaccine became a reality.

As travel restrictions eased, the four companies began a steady climb that lasted well over a year and resulted in them all achieving record-breaking share prices.

In 2022, that rise came back to reality, even as underlying structural factors continued to provide them with massive tailwinds.

Today, shares of all four companies remain below pre-pandemic volumes, let alone their late-2021 peak.

Since the end of 2019, Hays stock is down about 45 percent, while Robert Walters stock is down 31 percent and PageGroup stock is down about 16 percent.

What is the outlook for recruiters?

The global economy has remained relatively stable since the pandemic, despite elevated inflation and interest rates.

In the UK, unemployment is only slightly above pre-crisis levels at 4.2 per cent, while the number of job vacancies is currently over 1 million.

But the full impact of the Bank of England’s 14 consecutive rate hikes has yet to be felt.

REC’s Shoesmith warned that the latest UK GDP figure — 0.2 per cent in the third quarter — “wasn’t good enough to give employers, recruiters’ clients, full confidence to move forward with new hiring plans – and it’s having a direct impact out on recruiters.”

Forecasters from the Bank of England, KPMG and other major organizations expect unemployment to rise soon. Therefore, it would not be a surprise if the recruitment sector implemented further job cuts.

But labor markets remain very tight in many countries while so many sectors, notably hospitality and construction, are struggling desperately to recruit new workers.

There will be winners and losers, but there’s still a chance that some headhunters will weather the current difficulties just fine.