Unemployment in the United Kingdom unexpectedly fell in the three months to February, offering a brief sign of resilience in the labour market.
However, economists and business groups warn that the fallout from the Middle East conflict is likely to reverse this trend, with rising energy costs expected to weigh on hiring and push joblessness higher in the months ahead.
Jobless rate falls but underlying weakness persists
Data released by the Office for National Statistics showed that the unemployment rate declined to 4.9% in the three months to February, down from 5.2% in the three months to January.
The figure came as a surprise to economists, who had expected the rate to remain unchanged.
Despite the drop, broader indicators pointed to a weakening labour market.
Wage growth excluding bonuses slowed to 3.6% year-on-year, its lowest level since November 2020, while private sector pay growth edged down to 3.2%.
The latter is broadly consistent with the Bank of England’s target of bringing inflation back to 2%.
Liz McKeown, director of economic statistics at the ONS, said the number of workers on payrolls had remained broadly flat in recent months, reflecting weak hiring conditions.
“Vacancies fell to their lowest level in almost five years, but with unemployment also falling, the number of vacancies per unemployed person remains broadly unchanged,” she said.
Iran conflict begins to show in early indicators
The latest labour market data does not fully capture the economic impact of the Iran war, which began on 28 February.
However, more recent figures suggest conditions have already started to deteriorate.
Provisional tax data showed the number of employees on payrolls fell by 11,000 in March, more than double the decline expected by economists.
Earlier estimates for February were also revised down, indicating a contraction rather than growth.
The disruption to global energy markets, particularly around the Strait of Hormuz, has pushed up oil and gas prices, increasing costs for businesses and households alike.
Analysts say this is likely to dampen consumer demand while raising input costs, a combination that typically leads to slower hiring and job cuts.
Economists warn of rising unemployment ahead
Forecasts suggest that the labour market could weaken significantly over the next two years.
The EY Item Club expects unemployment to reach 5.8% by mid-2027, with nearly 250,000 additional job losses linked to the energy shock, pushing the total number of jobseekers above 2.1 million.
Some economists argue that the recent fall in unemployment masks deeper fragility.
Thomas Pugh, chief economist at the audit and tax firm RSM, said the decline was largely driven by people leaving the labour force rather than a meaningful increase in employment.
“Indeed, employment only rose by 24,000 in the three months to February, well below population growth,” he said, adding that payroll numbers had already started to contract.
Pugh noted that slowing wage growth and declining vacancies suggest the labour market was already weakening before the energy crisis took hold.
He added that provisional March data reinforced this view, pointing to a further softening in conditions.
“The provisional data for March suggests the labour market weakened last month,” he said.
Rising energy prices, he warned, could trigger a pullback in consumer demand while increasing costs for businesses, pushing unemployment higher.
Pugh said the unemployment rate could peak at around 5.5%, but cautioned that it could approach 6% if energy prices rise further over the summer.
Rate outlook steadies as wage pressures ease
The softening labour market may also influence monetary policy.
Policymakers at the Bank of England are set to review the latest employment and inflation data before their next interest rate decision on 30 April, with economists widely expecting the base rate to remain on hold at 3.75%.
Pugh said weaker labour market conditions reduce the risk of a wage-price spiral, a key concern for policymakers.
“The weak labour market substantially lowers the risk of higher energy prices feeding through into higher wages as they did in 2022,” he said, adding that workers are now in a weaker position to demand higher pay.
He said this dynamic would likely temper the need for aggressive rate hikes, with the base case pointing to a prolonged pause in interest rates unless inflation rises sharply.
Businesses brace for uncertainty
Business groups have also struck a cautious tone.
British Chambers of Commerce said that while the drop in unemployment was unexpected, rising uncertainty linked to the Iran conflict is likely to weigh on the labour market.
Patrick Milnes said the cost of employment remains high and is expected to rise further as new labour regulations come into effect.
“With the cost of employment also high, and expected to rise as the Employment Rights Act comes into effect, our latest forecast expects unemployment to hit 5.5% this year,” he said.
He added that slowing wage growth indicates businesses are becoming more cautious, suggesting the labour market will continue to loosen.
The post UK unemployment rate dips to 4.9%, but energy shock threatens rebound appeared first on Invezz