Wage growth hits lowest level since November 2020; unemployment rate unexpectedly falls - business live

Here’s the ONS chart showing the unexpected fall in the UK’s unemployment rate in the three months ended in February – though it does not include the impact of the Iran war, which started at the end of that month.

The impact of the war is expected to hurt the labour market in the coming months. The EY Item Club has forecast that unemployment will hit 5.8% by the middle of 2027, with almost 250,000 more people losing their jobs because of the crisis in the Middle East, pushing the number of jobseekers to more than 2.1 million.

Economists are not convinced that the UK’s labour market is a healthy one. Thomas Pugh, chief economist at the audit and tax firm RSM, notes that the drop in the unemployment rate was mostly driven by people dropping out of the labour force.

Indeed, employment only rose by 24,000 in the three months to February, well below population growth. What’s more, the number of people on payrolls contracted slightly in February. Private sector pay growth ex-bonus also slowed slightly from 3.3% to 3.2%. All this suggests that despite the fall in the headline unemployment rate, the labour market remained weak going into the energy crisis.

The provisional data for March suggests the labour market weakened last month. Payrolls dropped by 11,000 and the number of vacancies fell again. The risk is that rising energy prices prompt a big pull back in consumer demand while simultaneously pushing up input costs for businesses, which would push the unemployment rate even higher. We now think the unemployment rate will probably peak at around 5.5%. If energy prices rise higher over the summer as supply becomes even more constricted, the unemployment rate could move towards 6%.

The weak labour market substantially lowers the risk of higher energy prices feeding through into higher wages as they did in 2022 as evidenced by slowing pay growth. Workers are in a much weaker position than they were in 2022 and will find it harder to bid up nominal wages to protect their real incomes. That will lessen the second-round effects that the MPC is most worried about. That, in turn, will temper the need for aggressive rate hikes.

The base case is still for a prolonged interest rate hold, rather than a series of rate hikes, unless inflation goes substantially higher.”

Unemployment still likely to rise this year, BCC warns

While the latest figures show a fall in the UK’s unemployment rate, businesses are warning that it is likely to rise overall this year.

Patrick Milnes, head of people and work at the British Chambers of Commerce, said:

While unemployment has seen a surprise fall to 4.9%, the expectation is that it will rise this year as business uncertainty caused by the Iran War overshadows the UK economy.

With the cost of employment also high, and expected to rise as the Employment Rights Act comes into effect, our latest forecast expects unemployment to hit 5.5% this year. The slow-down in wage growth indicates businesses are taking their foot off the gas and the labour market will continue to loosen.

With the conflict in Iran likely to drive higher inflation and weaken growth, the spectre of stagflation is beginning to grow.

This has upended expectations at the start of the year of further interest rate cuts by the BankofEngland, increasing the level of uncertainty still further.

The government must move swiftly to show that it understands the problems firms face. Action to ease the cost burdens they face, such as help with electricity bills and reform of business rates would go a long way to demonstrating this.”

Introduction: Wage growth hits lowest level since November 2020

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Unemployment in the UK fell from a post-pandemic high in the three months ended in February, the latest figures show.

The unemployment rate unexpectedly dropped to 4.9% in February, according to figures from the Office for National Statistics – down from 5.2% in the previous quarter.

However, wage growth was meagre, hitting its lowest level since November 2020 at just 3.6% for regular earnings excluding bonuses. Total pay, which includes bonuses, also dropped to a five-year low of 3.8%.

Liz McKeown, director of economic statistics at the ONS, said:

The number of workers on payroll remained broadly flat in recent periods, reflecting ongoing weak hiring.

Vacancies fell to their lowest level in almost five years, but with unemployment also falling the number of vacancies per unemployed person remains broadly unchanged.

Alongside falling unemployment, the number of people not actively seeking work increased, with data suggesting fewer students seeking work alongside their studies.

Regular wage growth has slowed further with growth at its lowest rate in over five years.”

Jonathan Raymond, investment manager at QuilterCheviot, notes that today’s release does not capture the impact of the war in the Middle East.

Given today’s data does not capture the initial impact of the conflict in the Middle East, we can expect the labour market to soften even more from here on out. Businesses have had hiring plans largely on hold since before the budget, and many will have swiftly put the brakes on again at the outbreak of the war. 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.

The BankofEngland’s monetary policy committee will reconvene next week to deliver its next interest rate decision, and today’s data, as well as what is expected to be an unpleasant inflation print tomorrow, will only further cement expectations for a hold. The conflict in the Middle East has seen energy prices soar, and the full effects will take some time to feed through, adding a fresh inflation risk and complicating the Bank’s decision-making process. It will soon have to make a call on how much it looks through any inflation spike and look instead to potential growth implications.”

Elsewhere, oil is down slightly this morning, with Brent crude – the international benchmark – down by just under 1% to $94.63 a barrel. It reflect some cautious optimism that DonaldTrump will be able to secure a peace deal in Iran, despite comments from the US president on Monday night that it is “highly unlikely” he will extend the current ceasefire agreement, which expires on Wednesday.