No feelgood factor for Reeves as Iran war snuffs out economic upturn | Economics
News that the UK unemployment rate jumped back to 5% in March appears to be the latest evidence that the Iran war is ending the economic recovery that Rachel Reeves had hoped to see in 2026.
The Office for National Statistics said that after the unemployment rate unexpectedly fell to 4.9% in last month’s data, it rose again to 5% between January and March, the first figure affected by conflict.
The Chancellor wanted this year to be the year he could claim to have brought stability to the economy and public finances, with falling inflation and widely expected interest rate cuts reigniting the feel-good factor.
Instead, the Iran war has unleashed a new wave of inflation (the latest data on this issue is due on Wednesday) and has shaken business confidence.
More recent employment data using HMRC’s PAYE data suggests a more serious shock may be on the way than what is evident in the standard Labor Force Survey.
The number of payroll jobs in the economy fell by 100,000, or 0.3%, in April on this measure; However, the ONS emphasizes that this is a provisional estimate. This was the third-largest monthly decline since the series began in 2014. The annual decline in payroll jobs was 0.7%, the fastest decline in the last five years.
The data also highlighted how challenging the next few months will be for households. The ONS says regular pay, excluding bonuses, rose by just 3.4% from January to March.
This is the weakest rate since August-October 2020, at the height of the Covid outbreak, and will mean many families are starting to feel the pinch as prices rise. Regular wage growth in the private sector was only 3%.
If there is a modest silver lining, such anemic wage growth could help allay some of the worst fears of Bank of England policymakers, namely that workers might raise their wages in response to the price shock and help stabilize inflation.
This becomes difficult to imagine in a labor market where unemployment is rising and wage growth is at its weakest level in more than five years.
The bank’s monetary policy committee (MPC) will have to decide whether to raise interest rates next month to prevent such second-round effects, and labor market weakness is a vital factor they are monitoring.
Sanjay Raja, Deutsche Bank’s chief UK economist, suggested employment data would likely “stop the MPC in its tracks”, which could at least avoid the additional pain of higher borrowing costs. “This is the kind of data that will allow the MPC to remain on hold longer while it digests the impact of the Iran conflict,” he said.
But for Reeves and his under-pressure boss Keir Starmer, the data suggest that while the International Monetary Fund has given the chancellor its seal of approval, households hit hard by rising unemployment and shrinking living standards are unlikely to be sympathetic.
