UK unemployment shows surprise fall to 4.9% as pay growth drops to lowest in five years | Economics
Unemployment in the UK fell unexpectedly in the three months to February, official figures show; however, the effects of the conflict in the Middle East are expected to cause an increase in layoffs.
The Office for National Statistics (ONS) said the unemployment rate 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, which economists also expected to see in February.
Pay growth, excluding bonuses, fell to 3.6% annually 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 the 3.5% City economists had expected.
Wages, including bonuses, rose 3.8%, slowing from a 4.1% increase in the previous quarter.
KPMG chief economist Yael Selfin said the drop in unemployment was “consistent with survey evidence that hiring activity was picking up ahead of the conflict in the Middle East.”
But he added: “Unemployment is likely to trend higher in the coming months as firms reduce hiring in response to rising costs and weak demand.”
The Iran war began on February 28, which means employment data does not reflect how employers are responding to rising energy costs. But more recent tax figures released by the ONS showed the number of workers on payroll fell by 11,000 to 30.3 million in March.
Economists had expected a decline of 5,000. The ONS’s previous forecast for a rise of 20,000 in February has also been revised down to 6,000.
The number of job vacancies fell from 721,000 in the three months to February to 711,000 in March.
Ashley Webb, 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 putting pressure on businesses’ hiring plans, leading to further softening in wage growth”.
Work and Pensions Secretary Pat McFadden said: “These figures show an improvement in the labor market at the start of the year, with unemployment falling below 5% and 332,000 more people working than a year ago.
“However, we cannot escape the effects of the war in the Middle East, which will be reflected in prices and employment in the coming months. We will do our best to support the country during this period.”
Additionally, the rate of economic inactivity, which includes people who are not actively looking for work or are not ready to start a business, rose to 21% from 20.7% in the previous quarter. The ONS said this was largely due to fewer students looking for work alongside their studies.
Private sector wage growth slowed from 3.3 percent to 3.2 percent; The Bank of England has previously said this would be consistent with its target of lifting inflation to 2 per cent. The March inflation rate will be announced by the ONS on Wednesday.
Policymakers at the bank will review labor market data and inflation numbers on Tuesday before making their next interest rate decision on April 30. Economists expect the base rate to remain steady at 3.75 percent.
Webb said: “The decline in the unemployment rate suggests that the labor market was beginning to stabilize before the Iran war, but current figures suggest this will not last. If this is the case, there is a possibility that the rate hike will be less than markets expect.”
EY Item Club predicts that unemployment will reach 5.8% by mid-2027, with almost 250,000 more people losing their jobs due to the crisis in the Middle East, and the number of job seekers rising to over 2.1 million.
Young people are expected to bear the brunt of any increase in layoffs. The unemployment rate for 18-24 year olds fell slightly to 14.3% in the three months to February, from 14.5% in January, but remains the highest since 2015.
