Unemployment in the UK has unexpectedly climbed to 5% during the three months leading up to March, a notable increase from February’s rate of 4.9%. This rise, revealed by the Office for National Statistics (ONS), marks the first significant indicator of how businesses are grappling with the economic fallout from the ongoing conflict in Iran. As firms face mounting pressure from soaring energy prices, wage growth has also slowed markedly.
Sharp Decline in Employment Figures
Recent tax data has painted a troubling picture for the job market. In April, the number of payrolled employees plummeted by 100,000, following a decrease of 28,000 in March. This staggering drop is the largest monthly decline on record since 2014, far exceeding economists’ expectations. In tandem, job vacancies have sunk to their lowest level in five years, falling by 28,000 to a total of 705,000 between February and April.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, commented on the troubling trend, stating, “These figures signal a growing distress within the UK’s labour market as soaring labour costs and the fallout from the Iran war drive more businesses to reduce recruitment and limit pay awards.” The declining number of job vacancies suggests a rapidly deteriorating demand for staff, exacerbated by global economic challenges and the financial strain on companies.
Wage Growth Slows Amid Inflationary Pressures
Wage growth has also seen a slowdown, with year-on-year increases dropping to 3.4% in the three months to March, down from 3.6% in February. While this aligns with economists’ forecasts, it represents the slowest growth rate since October 2020. When adjusted for inflation, real wages have only increased by 0.3%. Including bonuses, wages rose 4.1%, a slight uptick from the previous quarter’s 3.8%.
Yael Selfin, chief economist at KPMG, warns that workers may soon face a period of declining real pay, as inflation is expected to outstrip earnings, driven predominantly by escalating energy and food prices. “Unlike the 2022 energy shock, the weaker labour market is expected to limit workers’ ability to secure higher pay settlements to offset rising costs,” Selfin noted.
Economic Growth Amidst Turbulence
The Iran conflict, which escalated on 28 February, has profoundly affected the UK economy. Despite the adverse circumstances, recent ONS data indicated a modest growth of 0.3% in March and a 0.6% increase over the first quarter of the year. This unexpected growth prompted the International Monetary Fund to revise its UK growth forecast for 2026, raising it from 0.8% to 1% due to the country’s “strong prewar momentum.”
However, the Bank of England is not as optimistic. They project unemployment to rise to 5.1% by mid-2026, potentially peaking between 5.5% and 5.6% by summer 2027, as the ongoing conflict and its economic repercussions continue to unfold.
Why it Matters
The current rise in unemployment and slowdown in wage growth underscores the precarious state of the UK labour market, exacerbated by external conflicts and rising costs. As companies tighten their belts in response to the escalating energy crisis, the implications for consumer spending and economic stability could be profound. If these trends persist, the UK could face a prolonged period of financial hardship, affecting not just employment but the overall health of the economy.
