UK unemployment is forecast to climb above its pandemic-era peak, which could lead to sector-specific challenges, especially in retail and hospitality, according to economists at JPMorgan Chase, who say business costs linked to last year’s Budget are continuing to weigh on hiring.
The bank expects the unemployment rate to rise to 5.5 per cent by late spring, up from 5.2 per cent in the three months to December, according to official figures from the Office for National Statistics.
If realised, that would take joblessness above its high point during the Covid-19 pandemic, when furlough schemes helped to cap unemployment despite severe economic disruption.
Economists say businesses are still adjusting to measures introduced in the 2024 Autumn Budget by Chancellor Rachel Reeves.
The measures Reeve introduced included a crippling £25bn increase in employer National Insurance contributions and a steep rise in the national minimum wage.
Allan Monks, chief UK economist at JPMorgan, said the rise in employer National Insurance had “disproportionately affected businesses employing higher proportions of lower-paid workers”, particularly in sectors such as retail and hospitality.
“Over a year has passed since the tax hike, and the jobs market is still stagnating,” he said.
Labour has defended the measures as necessary to stabilise public finances and fund public services, arguing that long-term economic stability is essential for sustainable job growth.
Beyond fiscal policy, structural shifts, such as the increased adoption of artificial intelligence and automation, are likely to shape the long-term economic outlook, affecting employment patterns and sector resilience.
The adoption of artificial intelligence and automation technologies has accelerated across sectors, with industries vulnerable to routine-task replacement appearing “relatively weak” in recent labour market data.
This suggests the slowdown is not solely cyclical but may reflect deeper shifts in employer demand.
A weaker labour market is expected to influence future policy decisions, with the Bank of England expected to announce further interest rate cuts, possibly as early as next quarter.
Monks suggested policymakers should “at least remove policy restrictiveness with two more cuts by June”, arguing that cooling inflation and rising slack in the labour market justify easing.
Recent comments from Monetary Policy Committee member Alan Taylor also signalled a dovish tilt. Taylor said there may be “two or three rate cuts to go before the theoretical neutral level,” adding that risks are shifting toward “lower inflation and higher unemployment.”
