UK unemployment shows surprise fall to 4.9% as pay growth drops to lowest in five years

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 that the rate of unemployment was 4.9% in the three months to February. 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. The fall was in line with what City economists had expected.

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.

Policymakers at the Bank of England will examine Tuesday’s employment market data and the inflation figures before making their next interest rate decision on 30 April. Economists expect the Bank to keep the base rate on hold at 3.75%.

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 data released by the ONS showed the number of employees on payrolls fell by 11,000 in March. Economists had expected a fall of 5,000. A previous estimate of a rise of 20,000 in February by the ONS was also revised down to a fall of 6,000.

Liz McKeown, the director of economic statistics at the ONS, said: “The number of workers on payroll remained broadly flat in recent periods, reflecting ongoing weak hiring.

“Vacancies fell to their lowest level in almost five years, but with unemployment also falling the number of vacancies per unemployed person remains broadly unchanged.”

The impact of the Iran war is expected to hurt the labour market in the coming months. The EY Item Club has forecast that unemployment will hit 5.8% by the middle of 2027, with almost 250,000 more people losing their jobs because of the crisis in the Middle East, pushing the number of jobseekers to more than 2.1 million.

Last week the International Monetary Fund warned that UK faced the biggest growth downgrade among the G7 group of countries, with 0.8% forecast for 2026, down from the 1.3% the IMF predicted in January.

Joblessness in the UK has been steadily rising since 2022, and businesses have complained that tax rises by Rachel Reeves in her last two budgets have exacerbated this, with increases in employer national insurance contributions and the minimum wage causing particular problems.