By Don Nico Forbes
Unemployment in the U.K. remained at its highest level in nearly five years in the three months through January, as war in the Middle East threatens to hit growth and push the jobless rate even higher in the coming months.
The unemployment rate was 5.2%, unchanged compared with the three months through December, Britain's Office for National Statistics said Thursday.
Annual wage growth, excluding bonuses, was 3.8%, marking the slowest rate of growth in more than five years. This compares with a revised 4.1% in the prior period.
A consensus of economists polled by The Wall Street Journal expected a jobless rate of 5.2% and adjusted wage growth at 4.0%.
January's reading reflects a frail labor market after unemployment picked up steadily over 2025, driven higher by an increase in a tax on employers and the rise in U.S. duties.
U.K. luxury carmaker Bentley said Tuesday that it plans to cut roughly 6% of its workforce as President Trump's tariffs started to bite.
A stubbornly high rate of unemployment underscores broader stagnation in the economy at the start of this year, even prior to the fallout due to the conflict in the Middle East. Data published last week showed economic growth unexpectedly stalling in January.
"These figures confirm that the U.K.'s labor market headed into this energy crisis in a fragile state," Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said.
A rate cut by the Bank of England anytime soon therefore looks increasingly remote, he added.
The central bank on Thursday voted unanimously to keep its key rate on hold, but said it remains ready to act if necessary to keep inflation in check.
The combination of a weak labor market and soft growth data had led to increased expectations of a rate cut by the BOE in March. But soaring energy prices amid conflict in the Middle East threaten to push up inflation and derail the central bank's rate path.
Going forward, the BOE finds itself with a difficult decision to make: cut rates to shore up a softening economy and labor market or stay restrictive to keep inflation in check.
For now, economists expect the bank to remain in a wait-and-see mode, with the outlook hinging on how long the Middle East conflict persists.
"We have held interest rates at 3.75% as we assess how events unfold," BOE Gov. Andrew Bailey said.
"Whatever happens, our job is to make sure inflation gets back to its 2% target."
The BOE previously warned that a sustained rise in unemployment above forecasts could push inflation below its target of 2%. In early February, the bank raised its expectations for peak unemployment in mid-2026 to 5.3% from 5.1%.
But geopolitical uncertainty threatens to push both the jobless rate and inflation even higher. After attacks on Iran by the U.S. and Israel, the British Chamber of Commerce raised its forecast for unemployment to 5.5% this year, a rate it expects to endure through 2027.
The BCC also lowered its 2026 growth forecasts for the U.K. to 1.0%, from 1.2% previously, and raised its view on inflation to 2.7%, up from 2.1%.
Youth unemployment rate remains a key concern for the labor market, after hitting a 10-year high of 16.1% in the final quarter of 2025. The Office for Budget Responsibility--which also raised its unemployment forecast earlier this month--cited new entrants to the labor force struggling to find work as a key sign of weakness in the market.
Still, Thursday's data provided at least a few silver linings, according to Sanjay Raja, chief U.K. economist at Deutsche Bank.
Despite unemployment remaining high, February had an uptick in payrolled employees while vacancies fell less than expected, contributing to signs of stabilization in the labor market, Raja said.
An early estimate of payrolled employees for February rose on month by 20,000, compared with an increase of 6,000 in January, the ONS said.
The BOE will also welcome another slowdown in wage growth, Raja added.
But the Iran conflict is still likely to hit sentiment and hiring plans in the coming months. "Indeed, while there are silver linings spread across [Thursday's] report, dark clouds are approaching," Raja said.
Write to Don Nico Forbes at don.forbes@wsj.com
(END) Dow Jones Newswires
March 19, 2026 08:40 ET (12:40 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
