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 the rate of unemployment was 4.9% in 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. After taking account of inflation, wages grew by just 0.2%.
Including bonuses, wages increased by 3.8%, slowing from a rise of 4.1% in the previous quarter.
The fall in unemployment is believed to be largely owing to a rise in economic inactivity, rather than more people being in work. The proportion of people who were not actively looking for work or available to start a job rose to 21% in February, from 20.7% in the previous quarter. The ONS said the increase was driven by fewer students looking for work alongside their studies.
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. 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”.
Some sectors of the economy, such as retail and hospitality, were already feeling the squeeze from rises in national insurance contributions (NICs) and the minimum wage over the past two years. The ONS said the retail and wholesale sector shed 57,000 jobs in the three months to February.
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.”
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.
Separate analysis from the Resolution Foundation has forecast that a worsening Middle East conflict could deal a £16bn blow to the UK’s public finances.
The thinktank modelled a “severe but plausible scenario”, in which there esd a 9% fall in UK equities, a rise in long-term interest rates of 0.5 percentage points and a 0.5% fall in employment.
It estimated this would cause borrowing to rise about £16bn higher in 2029-30 than estimated at the time of the Treasury’s spring forecast, wiping out nearly three-quarters of the £22bn headroom that the chancellor, Rachel Reeves, built up in her last budget.
