UK jobs market was in a fragile state – even before Iran war threatened recovery

Despite a surprise fall in the unemployment rate, the latest jobs data show the labour market in a fragile state, even before the Iran war threatened to derail the UK’s nascent economic recovery.

At 4.9% in the three months to February, the unemployment rate was down from 5.2% in the previous three months, according to the Office for National Statistics.

That may suggest the labour market has improved, alongside the uptick in economic growth in February. But this surprise good news was accompanied by an increase in economic inactivity – people who were not even searching for work, for whatever reason.

Payrolled jobs, a separate measure of how many people are employed in the economy, continued to decline – with provisional data for March down 65,000 on the same month a year ago.

Sanjay Raja, the chief UK economist at Deutsche Bank, said: “Despite the labour market seemingly entering the Iran conflict on better footing, we would caution on any optimism just yet. Indeed, underneath the hood, and beyond the headline unemployment rate, signs of weakness continue.”

And with a price shock looming, as the strait of Hormuz remains closed, weak wage growth suggests UK workers are already likely to have been feeling the pinch.

The data shows total annual pay growth in the three months to February at 3.8%, its weakest since autumn 2020, in the depths of the pandemic. In the private sector, regular pay growth – excluding bonuses – was just 3.2%.

Once adjusted for inflation – one proxy for living standards – total pay growth stood at a measly 0.7%, the weakest since mid-2023.

That was hardly conducive to the feelgood factor, even before petrol prices started to rise, and seems unlikely to leave voters tripping happily to the polls for the imminent Scottish, Welsh and English local government elections. It may also increase the pressure on Rachel Reeves to do more to help cushion consumers as energy costs rise in the run-up to next winter.

Certainly, the weak jobs market suggests workers are unlikely to have much luck bidding up their wages in the coming months, to help them weather the storm.

As Peter Dixon, a senior economist at the thinktank the National Institute of Economic and Social Research, put it: “Although price inflation is set to accelerate, workers may struggle to push for higher wages in the face of company resistance.”

Indeed, recent forecasts have suggested that instead, unemployment is poised to rise through 2026, as the knock-on effects of the war crimp economic growth.