The UK’s unemployment rate unexpectedly fell to 4.9% in the three months to February, defying predictions it would remain unchanged at 5.2%, according to figures released by the Office for National Statistics (ONS). However, this seemingly positive headline figure is largely attributed to a rise in the number of people not actively seeking work, particularly fewer students looking for employment while studying.
Unemployment Drop Driven by Inactivity
The ONS reported that the unemployment rate for the December to February period decreased by 0.3 percentage points, reaching 4.9%. This reduction was primarily driven by an increase in ‘economic inactivity,’ a category that includes individuals neither in work nor actively seeking it. The inactivity rate climbed to 21% during this period, up from 20.7% previously.
Liz McKeown, director of economic statistics at the ONS, confirmed this trend, stating, “Alongside falling unemployment, the number of people not actively seeking work increased, with data suggesting fewer students seeking work alongside their studies.” This observation was echoed by James Smith, an economist at ING, who noted that the fall in the jobless rate did not “appear to be because of a big shift into work.” Smith elaborated, “The details reveal the drop in the jobless rate is pretty much solely down to a rise in ‘economic inactivity’ – that is, people neither in work nor actively seeking it,” adding that the ONS specifically highlighted this trend for students.
Wage Growth Slows, Vacancies Decline
Concurrent with the unemployment figures, wage growth showed signs of moderation. Average annual earnings, excluding bonuses, rose by 3.6% between December and February. While this rate is the weakest recorded since late 2020, it still outpaced inflation during the period. Despite this, the broader labour market exhibited other indicators of cooling. The number of job vacancies continued its downward trajectory, falling to 711,000 for the January to March period, marking the lowest level in almost five years.
Furthermore, early estimates from the ONS suggest a slight contraction in payrolled employment. The number of workers in payrolled employment slipped by 11,000 in March, the first month following the outbreak of the US-Israeli war with Iran. This data point hints at potential shifts in the labour market in response to emerging geopolitical and economic pressures.
Geopolitical Tensions and Future Outlook
It is crucial to note that most of the ONS data for the December to February period was collected prior to the recent escalation of the US-Israeli war with Iran. This conflict has subsequently led to a significant surge in global energy prices, a factor economists warn could impact the jobs market in the coming months.
Yael Selfin, chief economist at KPMG UK, commented on the labour market’s state, suggesting it “showed signs of stabilising in February, but a reversal may be on the horizon.” She acknowledged that the fall in the unemployment rate was “consistent with survey evidence suggesting hiring activity was recovering before the conflict in the Middle-East.” However, Selfin cautioned, “unemployment is likely to trend higher in the coming months as firms scale back on hiring in response to rising costs and weaker demand.”
The International Monetary Fund (IMF) recently revised its forecast for UK economic growth this year, cutting it to 0.8% from an earlier prediction of 1.3% made in January. The IMF attributed this downgrade to the energy shock stemming from the Middle East conflict, predicting that the UK, as a net importer of energy, would be hit hardest among the world’s advanced economies. This comes despite official data from last week showing the UK economy grew by a faster-than-expected 0.5% in February, indicating some economic momentum before the conflict intensified.
Challenges for Young Job Seekers
On the ground, organisations like the Youth Employment Hub in Peterborough are observing the challenges faced by young people entering or re-entering the job market. Dean Watson, who runs the hub, which offers careers advice and training to 16-24-year-olds, highlights a pervasive issue: “Confidence is number one, mental health, anxiety, nerves. Job searching is demoralising.”
Leo, a 20-year-old who has been attending the hub since January, shared his struggles with finding employment in construction. “I was always sending out different applications, sending my CV to as many places I can. You only get some come back to you. You don’t really hear much back.” However, the hub has provided him with new avenues, with Leo stating, “Being here, I’ve realised I’ve got huge opportunities. I’ve been enrolled onto a sales and leadership course for the next six weeks.” His experience underscores the difficulties in securing entry-level positions and the value of targeted support in navigating the current labour landscape.
The latest ONS data presents a complex picture: a headline fall in unemployment that masks a rise in economic inactivity, particularly among students. While wage growth continues to outpace inflation, a cooling labour market is evident in declining vacancies and early payroll slips. The outlook remains clouded by geopolitical tensions and the potential for rising energy costs to further dampen economic activity and hiring intentions in the coming months, suggesting that the current stability may be precarious.
