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Unemployment in the UK unexpectedly fell in the three months to February, according to official figures – but the fallout from the conflict in the Middle East is expected to cause a rise in job cuts.
The Office for National Statistics (ONS) said that the rate of unemployment was 4.9% in the three months to February, the lowest level since last summer. This compares with 5.2% in the three months to January, a rate that economists had expected to also see in February.
Excluding bonuses, wage growth fell to 3.6% year on year in the three months to February, down from 3.8% in January and the lowest level since November 2020. The fall was slightly less than a drop to 3.5% that City economists had expected.
Including bonuses, wages increased by 3.8%, slowing from a rise of 4.1% in the previous quarter.
Yael Selfin, the chief economist at KPMG, said the fall in unemployment was “consistent with survey evidence suggesting hiring activity was recovering before the conflict in the Middle East”.
However, she added: “Unemployment is likely to trend higher in the coming months as firms scale back on hiring in response to rising costs and weaker demand.”
The Iran war began on 28 February, meaning the jobs data does not reflect how employers have responded to rising energy costs. However, more up-to-date tax figures released by the ONS showed the number of employees on payrolls fell by 11,000 in March to 30.3 million.
Economists had expected a fall of 5,000. A previous estimate of a rise of 20,000 in February by the ONS was also revised down, to a fall of 6,000.
The number of job vacancies declined from 721,000 in the three months to February to 711,000 in March.
Ashley Webb, the senior UK economist at Capital Economics, said the figures provided “the first signs that the rise in energy prices due to the Iran war is weighing on businesses’ hiring plans and that is feeding through into a further softening in pay growth”.
Pat McFadden, the work and pensions secretary, said: “These figures show that there was an improvement in the labour market at the beginning of the year with unemployment falling below 5%, and 332,000 more people in work than a year ago.
“But we cannot escape the effects of the war in the Middle East which are likely to feed through to prices and employment in the coming months. We will do everything we can to support the country through this period.”
There was also a rise in economic inactivity, which counts people who are not actively looking for work or available to start a job, to 21%, from 20.7% in the previous quarter. The ONS said this was largely driven by fewer students looking for work alongside their studies.
Private sector pay growth slowed from 3.3% to 3.2%, which the Bank of England has previously said would be consistent with its target of getting inflation to 2%. The rate of inflation in March will be released by the ONS on Wednesday.
Policymakers at the Bank will examine Tuesday’s employment market data and the inflation figures before making their next interest rate decision on 30 April. Economists expect it to keep the base rate on hold at 3.75%.
Webb said: “The fall in the unemployment rate suggests that the labour market was starting to stabilise before the Iran war, but the more timely figures imply that won’t last. If that’s the case, interest rate hikes are less likely than the markets expect.”
The EY Item Club has forecast that unemployment will hit 5.8% by the middle of 2027, with almost 250,000 more people losing their jobs because of the crisis in the Middle East, pushing the number of jobseekers to more than 2.1 million.
Young people are expected to bear the brunt of any rise in job cuts. The unemployment rate for 18- to 24-year-olds dipped slightly in the three months to February to 14.3%, from 14.5% in January, but still remains at the highest level since 2015.
