Britain’s labour market is losing momentum as unemployment ticks higher, vacancies tumble, and wage growth continues to slow, fuelling fears the economy is drifting towards a stagflationary squeeze.
Official figures showed the jobless rate rose to 5pc from 4.9pc, while businesses pulled back further on recruitment amid mounting uncertainty over the economic outlook.
Vacancies dropped to around 705,000 — the lowest level since early 2021 — highlighting weakening demand for workers across large parts of the economy as firms become increasingly cautious about expansion and hiring.
At the same time, pay growth continued to soften. Regular earnings excluding bonuses rose by 3.4pc year-on-year, only narrowly outpacing inflation, while total pay including bonuses increased by 4.1pc.
The latest figures are likely to intensify concerns at the Bank of England and within the Government that Britain is entering a more fragile economic phase marked by slowing growth and stubborn inflationary pressures.
Economists warned that renewed conflict in the Middle East risks further worsening the outlook by driving up crude oil prices and increasing pressure on energy and consumer prices, even as economic activity slows.
The combination has revived fears of stagflation — the toxic mix of weak growth, rising unemployment and persistent inflation that haunted Britain during previous energy shocks.
With households already under pressure from elevated living costs and businesses facing rising operating expenses, policymakers are increasingly concerned that a prolonged period of geopolitical instability could deepen the slowdown across the wider economy.
Susannah Streeter, chief investment strategist, Wealth Club said: “Stagflation worries are stalking the UK as the latest data shows the labour market continuing to lose momentum, while conflict in the Middle East has fanned the flames of inflation. The jobs numbers show employers are becoming increasingly cautious about hiring amid a backdrop of sluggish growth, geopolitical uncertainty and increasing cost pressures.
The rise in unemployment from 4.9% to 5% adds to mounting evidence that cracks are beginning to widen in the labour market. Vacancies are also continuing their steady descent, falling again to 705,000, the lowest level since early 2021.
There’s another warning sign coming from the employment data, with the early estimate for April showing the number of payrolled employees falling by 210,000 compared with a year earlier, alongside a monthly decline of 100,000. It appears businesses are becoming markedly more defensive as economic uncertainty intensifies.
Wage pressures have eased further, with regular pay growth slowing to 3.4%, down from 3.6% and well below the elevated post-pandemic highs. Ordinarily, private sector wage growth cooling towards 3% would be the kind of mood music likely to prompt expectations of interest rate cuts. But given the discordant notes on inflation right now, pressure is building for rates to stay higher for longer instead. Financial markets are still pricing in three rate hikes by the end of the year, with the possibility of another increase next year.
Wage growth is still only just inching ahead of inflation, and by a meagre amount. This is likely to keep spending subdued, particularly as households brace for more bill increases ahead. This is likely to keep a lid on discretionary purchases, with retailers and hospitality firms particularly vulnerable if consumers continue cutting back on bigger-ticket purchases and prioritising essentials.
The FTSE 100 is poised to open on the front foot in early trade, as hopes remain alive for further talks aimed at resolving the Middle East conflict. President Trump has dialled down the rhetoric, reportedly calling off further strikes on Iran, following pressure from allies in the Gulf and this is leading to hopes that negotiations could resume again. The weaker labour market snapshot had largely been anticipated and is unlikely to prove a significant market mover. Investor sentiment is still likely to be driven by twists and turns in diplomatic efforts to calm tensions and secure a longer-term resolution. Until the Strait of Hormuz is fully reopened, inflation concerns are unlikely to meaningfully subside and are set to keep markets on edge.”
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