Employment prospects are on the decline with recruitment activity falling and redundancies rising, according to market watcher KPMG and the Chartered Institute of Personnel and Development (CIPD).

According to the Labour Market Outlook (LMO) survey 81 per cent of organisations are planning to recruit in the next three months, down from 86 per cent in spring 2008 and in winter 2007/08.

The survey of 1,221 UK employers found just over two in five organisations (42 per cent) are expected to have recruitment difficulties during the next three months.

One in four (29 per cent) of employers expect to increase staff levels in the third quarter, but this is a sharp drop from 37 per cent in the second quarter and the lowest reported since 2004 (58 per cent).

John Philpott, chief economist at CIPD, said: “The jobs market has been one of the few bright spots in the UK economy, but cracks are appearing in the face of an increasingly uncertain economic outlook. Even if we avoid the scale of jobs fallout suffered in previous downturns, the era of the candidate’s recruitment market is already over, with people in work becoming increasingly anxious that their P45 might soon be on its way.

“With pay pressure still subdued, mounting job insecurity is being compounded by a significant squeeze on workers’ real incomes. But the absence of any sign of an emerging wage-price spiral at least offers greater hope that the Bank of England might soon be able to cut interest rates to head off the threat of recession.”

The number of employers planning redundancies increased from 22 per cent to 27 per cent between the second and third quarter.

Andrew Smith, chief economist at KPMG, said: “Companies are now reacting to deteriorating market conditions. With sales slowing and input costs rising - but scope to raise prices limited by weakening demand - finances are under pressure.

“It looks as if employment costs, the main area over which businesses retain control, are taking the strain with employers seeking both to keep a lid on pay settlements and, in increasing numbers, planning for redundancies. The labour market is suddenly looking a lot less resilient.”

The average pay increase is expected to be 3.7 per cent, which is on target for the average spring quarter and similar to average pay increase including bonuses, which is expected to be 3.9 per cent.