The latest UK unemployment figures released by the Office for National Statistics (ONS) demonstrate signs of resilience, but experts have warned the ongoing war in Iran will lead to renewed fragility in the labour market.
The UK unemployment rate for 16 – 64-year-olds slid from 5.2% to 4.9% between December and February. Despite the decline – with the previous quarter’s figures at a five-year high, it came in above consensus forecasts.
Danni Hewson, AJ Bell head of financial analysis, noted the UK economy seems to have “dusted itself off” after a difficult end to 2025, as businesses learned to handle increased cost and speculation of the budget.
See also: UK economic growth tops forecasts but impact of war yet to be seen
While unemployment fell back from the previous high, it’s “impossible to know” whether this reflects a real turning point or simply a post-budget boost, the AJ Bell analyst noted.
On top of this, there were some warning signs beneath the bonnet, according to analysts. Regular wage growth hit a five-year low of 3.8%, and vacancies fell to near five-year lows as well, indicating “weakness in the labour market hadn’t really gone away”.
Susannah Streeter, chief investment strategist at the Wealth Club, noted any progress seemed increasingly fragile due to the war in Iran, which this data did not cover.
“Just as companies appeared to be rediscovering their mojo, the escalation in the Middle East and the renewed threat to energy supplies risk sapping confidence once again,” she said.
The Wealth Club analyst noted the easing in wage growth should, in theory, keep hopes of a rate cut alive. However, surging energy prices and geopolitical uncertainty may lead to increased borrowing to combat inflation, which could drive interest rates upwards.
“The concern now is that just as the UK economy was beginning to steady itself, a fresh external shock could knock it off course,” Streeter said.
Victoria Scholar, head of investment at interactive investor, described this data as “the calm before the storm”.
The labour market is expected to deteriorate as the war pushes inflation higher and weighs on growth. Meanwhile, the prospect of stagflation has led the Bank of England to reshape its expectations for inflation and interest rates for the rest of the year, Scholar explained.
Jonathan Raymond, investment manager at Quilter Cheviot, argued investors should expect the labour market to soften further, particularly if businesses pause hiring.
“When combined with other factors, including ongoing wage pressures, national insurance increases and changes to business rates, it is difficult to see the labour market making a swift recovery any time soon,” he concluded.
See also: Markets on edge as US-Iran deal hangs in balance and Starmer faces parliament
