UK job cuts suggest companies are turning cautious on Iran war

[LONDON] UK businesses stepped up job-cutting in March, a sign that the Iran war is causing fresh caution in the labour market – after warnings that Britain will be one of the hardest-hit advanced economies from the energy shock.

The number of employees on payrolls dropped 11,000, the biggest fall since November 2025 and double the decline seen in February, the tax data published by the Office for National Statistics (ONS) showed on Tuesday (Apr 21).

It was worse than the flat reading expected by economists.

The figures suggest the seven-week conflict is piling renewed pressure on the jobs market.

It had been showing tentative signs of stabilisation after being hit by sharp increases to payroll taxes and the minimum wage imposed by Prime Minister Keir Starmer’s Labour government.

Vacancies fell to the lowest level in almost five years.

Ashley Webb, senior UK economist at Capital Economics, said the figures were “the first signs that the rise in energy prices due to the Iran war is weighing on businesses’ hiring plans”.

While Labour Force Survey figures for the three months till February showed that unemployment unexpectedly fell to 4.9 per cent, it was largely driven by a pickup in economic inactivity, including among students.

That could be because Britons who were unable to find work are returning to the sidelines of the jobs market.

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Markets largely shrugged off Tuesday’s figures.

The pound was little changed, as were bets on at least one interest-rate rise from the Bank of England (BOE) in 2026 to head off the threat from inflation.

Jobless rate expected to increase

Economists now expect the jobless rate to increase, as companies slam the brakes on hiring.

The International Monetary Fund warned on Apr 14 that Britain will be one of the advanced economies to be hardest hit from the conflict, a statement that sent energy prices soaring.

It also predicted that unemployment will increase to 5.6 per cent in 2026.

The Secretary of State for Work and Pensions Pat McFadden said: “These figures show that there was an improvement in the labour market at the beginning of the year.

“But we cannot escape the effects of the war in the Middle East, which are likely to feed through to prices and employment in the coming months.”

Investors expect the BOE to respond – not by cutting interest rates to boost the economy, but raising them to stop higher inflation from triggering a feedback loop between wages and prices.

Figures on Wednesday are forecast to show that inflation had accelerated to 3.3 per cent in March from 3 per cent in February.

The ONS also said private-sector wage growth slowed to 3.2 per cent in the three months till February, in line with expectations and below the 3.25 per cent the BOE deems compatible with its 2 per cent inflation target.

Dan Hanson and Matt Bunny, economists for Bloomberg Economics, said: “With the inflation outlook being upended by the war, the key question for the BOE is whether a one-off increase in prices feeds into pay demands and adds to inflation persistence.

“The weakness in February’s pay data, alongside the prospect of a further softening in the jobs market, supports our baseline assumption that this mechanism is unlikely to take hold as it did in 2022.”

Youth unemployment, which has been a source of concern among officials in recent months, fell to 15.8 per cent from 16 per cent previously.

However, the economic inactivity rate – the share of Britons neither in work nor seeking a job – rose to 21 per cent, an increase that was driven by those aged 16 to 24.

Vacancies in the first quarter of 2026 fell 29,000 from the previous quarter to 711,000, the lowest since 2021.

Liz McKeown, the director of economic statistics for ONS, said: “Vacancies fell to their lowest level in almost five years, but with unemployment also falling, the number of vacancies for each unemployed person remains broadly unchanged.” BLOOMBERG