The UK unemployment rate has risen to 5%, marking a five-year high, as the ongoing Iran war derails the economic recovery anticipated by Chancellor Rachel Reeves. Data from the Office for National Statistics (ONS) shows the jobless rate increased between January and March, the first period fully reflecting the conflict's impact.
Wage growth has also weakened significantly, with regular pay excluding bonuses rising by just 3.4% year-on-year—the slowest rate since the depths of the Covid pandemic in 2020. Private sector pay growth was even lower at 3%. This squeeze on household incomes comes as inflation is expected to rise further, with fresh data due Wednesday.
The labour market is showing signs of strain beyond the headline figures. PAYE data from HMRC indicates a sharp drop in payrolled jobs, with a fall of 100,000 in April alone—the third-largest monthly decline since records began in 2014. Young people are particularly affected, with unemployment among 18- to 24-year-olds reaching 14.6%, the highest level in 11 years.
Economists warn that households face a severe financial squeeze. Edward Allenby of Oxford Economics said workers will struggle to secure pay rises to offset rising prices, compounded by tighter fiscal policy and higher debt servicing costs. The Bank of England's Monetary Policy Committee is now weighing whether to raise interest rates next month, though weak labour market data may persuade it to hold steady.
Sanjay Raja of Deutsche Bank suggested the jobs data could 'stop the MPC in its tracks', potentially avoiding further borrowing cost increases. Andrew Wishart of Berenberg added that an early resolution to the Iran conflict could allow the Bank to resume rate cuts later this year. For Chancellor Reeves and Prime Minister Keir Starmer, however, the rising unemployment and stagnant wages mean the feelgood factor remains elusive.
