Britain’s unemployment rate has fallen unexpectedly to 4.9%, down from 5.2% in the previous quarter, according to the latest figures from the Office for National Statistics. The drop, covering the three months to February, came in stronger than City expectations and has been presented by officials as a sign of resilience in the economy at the start of the year. However, a closer look at the data points to weakening underlying conditions in the labour market, with businesses showing reduced hiring appetite and wage growth losing momentum.
Vacancies fell to 711,000, their lowest level in nearly five years, while payrolled employment dropped by 11,000 in March alone. Since the £25 billion rise in employer national insurance contributions announced in October 2024, payrolled jobs have declined by 143,000. Small and medium-sized enterprises appear to be carrying much of the impact, as tighter margins and higher employment costs constrain recruitment plans.
Wage growth has also continued to cool. Regular pay rose by 3.6% in the three months to February, down from 3.8% previously, while private sector pay growth slowed further to 3.2%, its weakest reading since 2020. Public sector pay remains significantly higher at 5.2%, widening the gap between the two parts of the economy. For many business owners in retail, hospitality, and professional services, the slowdown in private wage growth reflects weaker hiring confidence and reduced competition for staff.
The labour data predates the escalation of the US-Israel-Iran conflict at the end of February, meaning more recent energy price pressures are not yet reflected. Economists warn that rising fuel and energy costs linked to the disruption in global supply routes could further strain employers in the months ahead.
Economic inactivity rose to 21%, up from 20.7%, with 116,000 additional people leaving the workforce. Officials attributed much of this to fewer students seeking part-time work, although underlying trends suggest a broader softening in participation. Employment among people aged 16 to 64 fell by 5,000, even as total employment rose slightly due to gains among older age groups.
Ashley Webb, senior UK economist at Capital Economics, said early indicators suggest that rising energy costs are beginning to weigh on hiring decisions, feeding into weaker pay growth.
Inflation is expected to rise to 3.3% in March, adding further pressure on business costs. The International Monetary Fund has also warned that the UK may be among the most exposed G7 economies to energy market volatility.
With the Bank of England set to meet next week, attention is turning to whether a softer labour market and slowing wages could influence interest rate decisions in the months ahead.
