UK unemployment unexpectedly rises to 5% as firms squeezed by Iran war | Economics
In the first snapshot of how companies are responding to the impact of the Iran war, wage growth has slowed as UK unemployment unexpectedly rose to 5%, official figures show.
The Office for National Statistics (ONS) said the unemployment rate rose in the three months to March from 4.9% in February; This rate was expected by City economists to remain constant.
More recent tax data showed the number of employees on payroll fell sharply to 100,000 people in April, following a drop of 28,000 in March. The decline was much sharper than expected and was the biggest monthly decline since the record began in 2014.
Vacancies also fell to a five-year low, falling by 28,000 to 705,000 in the February-April period.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said: “These figures point to growing distress in the UK labor market as rising labor costs and the effects of the Iran war prompt more businesses to cut hiring and limit pay awards.
“The continued decline in job vacancies is a worrying sign of the strength of the labor market, as it indicates that demand for staff is rapidly deteriorating amid global headwinds and increasing financial tightness on firms.”
Wage growth, excluding bonuses, was 3.4% year-on-year in the three months to March, up from 3.6% in February. This was the slowest growth since the three months to October 2020, although this was what economists had expected. Taking inflation into account, wages increased by only 0.3%.
Wages, including bonuses, rose 4.1%, down from a 3.8% increase in the previous quarter.
KPMG chief economist Yael Selfin said: “Workers are likely to face a period of decline in real wages as headline inflation will outpace earnings, driven by higher energy and food prices. Unlike the 2022 energy shock, the weak labor market is expected to limit workers’ ability to secure higher wage deals to offset rising costs.”
The Iran war began on February 28, marking the first month of official data showing how employers are responding to rising energy costs as global oil and gas prices rise sharply due to the effective closure of the Strait of Hormuz.
The emerging picture of how the UK economy has fared since the beginning of the Middle East conflict is mixed. Surveys show that consumers fear rising inflation and are cutting discretionary spending, while businesses also report sharp increases in input costs. However, figures published by the ONS last week showed that the UK economy grew by 0.3% in March and 0.6% in the first quarter.
This unexpectedly high GDP figure prompted the International Monetary Fund on Monday to raise its UK growth forecast for 2026 from 0.8% to 1% in 2026; this reflects the UK’s “strong pre-war momentum” and solid performance in the first quarter of the year.
However, the Bank of England Unemployment is expected to reach 5.1% by the middle of this year Current estimates of how the Iran war could affect the UK economy put the rate at between 5.5% and 5.6% by the summer of 2027.
