The United Kingdom's unemployment rate unexpectedly fell to a near two-year low, but the data precedes the full economic impact of the Middle East conflict.
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UK Unemployment Sees Surprise 4.9% Drop Before Iran Shock
The United Kingdom's unemployment rate unexpectedly fell to a near two-year low, but the data precedes the full economic impact of the Middle East conflict.
The UK’s unemployment rate fell to 4.9% in the three months through February, the Office for National Statistics said Tuesday, a surprising show of resilience before the recent escalation in the Middle East began to pressure firms.
“While the sharp drop in unemployment reported today is certainly eye catching, it will probably be largely dismissed by the market,” Luke Bartholomew, deputy chief economist at Aberdeen Group, said. “That’s partly because it only covers a period up to the end of February, so before the Iran conflict, and also because it largely seems to reflect rising inactivity rather than stronger hiring.”
The 4.9% rate was well below the 5.2% recorded in the three months to January and defied economists' forecasts for it to remain unchanged. However, timelier data showed the number of people claiming jobless benefits rose by 26,800 in March. Following the report, the Pound Sterling saw a modest gain, with GBP/USD trading around 1.3522.
The unexpected decline was driven more by a rise in economic inactivity than by a surge in hiring, complicating the outlook for the Bank of England. While slowing wage growth may ease pressure to keep rates high, the looming impact of higher energy prices and geopolitical uncertainty means the central bank will likely remain cautious at its next meeting.
Labor Market Shows Underlying Weakness
Despite the headline drop in joblessness, other figures pointed to a cooling labor market. The number of payrolled employees fell by about 11,000 in March, the first month to capture the initial effects of the conflict. Job vacancies also declined by 29,000 in the first quarter to 711,000, their lowest level in nearly five years.
The ONS said the fall in unemployment was largely due to a rise in the number of people classified as economically inactive — those not actively looking for work. The inactivity rate rose to 21%, with the statistics agency noting fewer students were seeking employment alongside their studies.
Wage Growth Slows but Outpaces Inflation
Wage data presented a mixed picture for the Bank of England. Average earnings excluding bonuses grew at an annual pace of 3.6% in the three months to February, the weakest rate since late 2020 but still ahead of inflation. Including bonuses, pay rose 3.8%.
A significant divergence remains between public and private sector pay. Public sector wages rose 5.2%, compared to just 3.2% in the private sector. Economists at KPMG UK expect this gap to narrow as slowing economic activity constrains worker bargaining power, reducing the risk of a wage-price spiral.
“The risk of higher energy costs reigniting pay pressures is also lower at the moment,” said Yael Selfin, chief economist at KPMG UK. “In contrast to the energy shock of 2022, the labour market is in a weaker state.”
This article is for informational purposes only and does not constitute investment advice.
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