UK unemployment has risen to 5% in a development that economists warn could mark the beginning of a more serious economic deterioration later this year.
The increase from 4.9% to 5% in the three months to March comes despite promising growth figures in the first quarter and the IMF upgrading its forecast for UK growth for 2026 from 0.8% to 1%. Average earnings growth excluding bonuses has simultaneously eased to 3.4%, its lowest level since 2020, suggesting that the labour market is weakening from both directions: fewer jobs and weaker pay momentum.
Businesses are now facing weaker demand, higher borrowing expenses and surging energy bills. Recruitment is slowing, expansion plans are being delayed, and in some sectors, job losses are beginning to emerge.
Emeritus Professor Joe Nellis, economic adviser at MHA, the accountancy and advisory firm, warned:
“The biggest concern is that unemployment tends to accelerate once it starts rising. A move to 5% may signal the start of a more serious deterioration later this year if economic conditions continue to weaken.
“Particularly alarming is the rise in youth unemployment, which continues to hover close to 16%. Younger workers are once again bearing the heaviest burden of economic uncertainty. Opportunities in retail, hospitality and entry-level professional roles are drying up fast, prompting worries that many young people could be locked out of the labour market altogether. That has long-term consequences not only for growth but also for social mobility, productivity and public spending.
“The worsening international backdrop is adding to the strain caused by domestic policy. The ongoing Middle East crisis is driving up energy and transport costs, squeezing already fragile business confidence and increasing the risk of another inflation shock.
“For the Bank of England and the government alike, these figures are deeply uncomfortable. A weakening labour market threatens tax revenues, increases welfare pressures and heightens the risk that the economic slowdown becomes far more entrenched.”
Luke Bartholomew, Deputy Chief Economist at Aberdeen, said:
“Today’s data confirms that the labour market remains soft. Jobs growth has been weak for sometime, and the Iran conflict seems to be exacerbating the shock, with payrolls employment down sharply. Rising unemployment is in turn weighing on private sector pay growth. Normally this slowing in wage growth would be a positive sign that inflation was on a sustainable path back to the 2% target. But inflation is set to surge in coming months due rising energy prices and other spillovers from the Iran conflict.
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“So weaker cash wages and higher inflation means that real, inflation adjusted, wages will start to fall, weighing further on household spending and growth. All of this creates a dilemma for the Bank of England. But absent a further surge in oil prices, it is hard to see interest rates being increased much if at all in this environment.”
The combination of rising unemployment and falling real wages presents a particular challenge for policymakers, who must balance concerns about economic growth against persistent inflation risks driven by the ongoing Middle East crisis.
