UK Unemployment Rises to 5.2 Percent—the Highest in Five Years

According to the Office for National Statistics, unemployment reached 5.2 per cent in the three months to December, up from 5.1 per cent in the previous quarter, marking the highest level in five years. The deterioration was particularly pronounced among young people: unemployment in this group climbed to 16.1 per cent—the highest in more than a decade, including the pandemic period. Many economists link the increase to rising payroll costs, which have made hiring entry-level workers less attractive for employers.

The Bank of England is closely monitoring the cooling labour market as it assesses the timing of further monetary easing. Some investors expect a quarter-point rate cut—to 3.5 per cent—at the regulator’s March meeting, as wage growth slows alongside easing inflation.

On these expectations, the pound weakened, falling 0.6 per cent against the dollar to $1.355. Following the release of the data, swaps traders raised the probability of a March rate cut from 70 to 75 per cent.

“Against the backdrop of rising unemployment and another decline in payroll employment, this is yet another weak labour market report,” said Luke Bartholomew, deputy chief economist at Aberdeen. In his view, the case for a rate cut at the Bank of England’s next meeting looks compelling, with the policy rate potentially falling to 3 per cent by the end of the year.

Growth in average weekly earnings excluding bonuses slowed to 4.2 per cent in the final three months of the year, down from a revised 4.4 per cent in the period to November, the ONS said. In the private sector, wage growth eased to 3.4 per cent, approaching the 3.25 per cent level that the Bank of England considers consistent with its 2 per cent inflation target.

The Bank of England’s Monetary Policy Committee kept the rate unchanged at 3.75 per cent at its most recent meeting this month—a decision taken by the narrowest of margins, leaving the door open to a cut as soon as March 19.

Tax data showed that the number of employees paid through company payrolls fell by 6,000 between November and December. On an annual basis, employment declined by 121,000, or 0.4 per cent. Preliminary estimates for January point to a further monthly drop of 11,000, although those figures are likely to be revised. The UK economy expanded by just 0.1 per cent in the fourth quarter, underscoring its sluggish momentum, according to official data published last week.

“Higher taxes, including the jobs tax, a sharp rise in business rates and anti-business regulation that increases risk—all of this makes hiring staff more difficult,” said Mel Stride, the Conservatives’ shadow chancellor.

Economists warn that rising youth unemployment points to the impact of higher labour costs—including increased employer contributions to national insurance—combined with fragile business sentiment. This, they argue, is making companies more cautious about hiring younger workers. A higher minimum wage may also act as an additional constraint.

“There are signs that it is younger workers who are being squeezed out of the labour market,” said Peter Dixon of the National Institute of Economic and Social Research. Jack Kennedy, an economist at Indeed, added that this makes it harder to take the first crucial step in a career and could have long-term consequences for earnings and professional development: “This is not just a short-term issue.”

The number of vacancies fell from 736,000 in the three months to December to 726,000 in January, according to ONS data, providing another signal of weakening demand for labour. James Smith, ING’s developed markets economist, said the figures keep the Bank of England firmly on track for a March rate cut. “Unless there are surprises in next month’s data—or in tomorrow’s inflation figures—a March cut looks highly likely,” he said, adding that the bank could move again in June and does not rule out further policy easing.