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The UK labour market showed signs of stabilization in February, with steady unemployment and stronger-than-expected job growth, even as rising energy costs threaten to weigh on the economic outlook.
Unemployment held at 5.2%, below expectations of 5.3%, while payrolls increased by 20,000, outperforming forecasts for a decline of 5,000.
Employment shows tentative recovery
The improvement in payrolls, along with upward revisions to December and January data, suggests that the worst effects of April 2025’s labour cost increases may be easing.
On a broader measure, employment rose by 84,000, while annual employment growth improved slightly from -0.3% to -0.2%.
However, underlying weakness remains, with job vacancies falling to 721,000 in February, down from 730,000 in the previous three-month period.
Wage growth continues to cool
Average earnings growth slowed to 3.9% in January, down from 4.2% in December, in line with expectations.
- Public sector wage growth declined from 7.0% to 5.9%
- Private sector wages (excluding bonuses) edged down from 3.4% to 3.3%
Notably, private sector wage growth is now close to the 3.25% level that the Bank of England considers consistent with its 2% inflation target.
Energy costs pose fresh risks
Despite improving employment data, analysts caution that rising energy prices—driven by recent developments in the Middle East—could create new headwinds for businesses.
Higher costs may pressure firms to cut hiring or reduce headcount in the coming months, particularly if demand weakens.
Economists warn that the economy could face a stagflationary environment, where slowing growth coincides with rising inflation.
Bank of England outlook unchanged
The latest data is unlikely to shift the Bank of England’s policy stance, with interest rates expected to remain at 3.75%.
However, policymakers are expected to remain cautious, balancing:
- Downside risks to economic activity
- Upside risks to inflation from higher energy prices
Outlook
While the UK labour market is showing early signs of stabilization, the outlook remains fragile.
Rising energy costs and geopolitical uncertainty could dampen business confidence, reduce hiring momentum, and complicate the path for monetary policy in the months ahead.
