UK unemployment rate surprisingly falls to 4.9%

Unemployment unexpectedly fell in February, partially driven by a drop in the number of students seeking work while they study, but the Iran war is set to make the dip short-lived.

The jobless rate fell to 4.9% in the three months to February, down from 5.2% in the three months to January, the latest data from the Office for National Statistics (ONS) shows.

Most economists had expected unemployment to stay at 5.2% in this period, but a drop in the economic inactivity rate meant the jobless rate was lower than anticipated.

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Economic inactivity measures the number of people who are not employed but are not actively seeking work, therefore taking them out of the unemployment statistics.

Liz McKeown, director of economic statistics at the ONS said the rise in economic inactivity suggests “fewer students [are] seeking work alongside their studies.”

As these students are not actively seeking work, they are not counted in the unemployment statistics.

The economic inactivity rate in the three months to February was 21%, up from 20.7% in the previous three months period.

Rob Morgan, chief investment analyst at Charles Stanley, said this resulted in the UK jobs market delivering a “mixed picture” in February as the drop in unemployment “largely reflects a rise in economic inactivity rather than a meaningful increase in employment.”

He added that the headline figure “masks a weaker underlying trend” in the labour market as the number of payrolled employees fell in both February and March, according to the ONS.

Payrolls dipped by 74,000 in the year to February, and provisional figures show they decreased by a further 11,000 between February and March this year.

Meanwhile, the number of vacancies available in the UK is at close to a five-year low as ONS estimates for January to March suggest a decrease of 29,000 vacancies compared with October to December 2025, a fall of 3.9%.

The figures come after the ONS reported that the UK economy grew by 0.5% in the three months to February, far exceeding estimates by most economists and potentially indicating that the economy was starting to rebound before the Iran war.

However, the war is now expected to hamper economic growth in the UK, with the International Monetary Fund (IMF) downgrading its UK GDP growth prediction to just 1.3% in 2026, down from the 1.5% it predicted before the war.

The downgrade was the largest the IMF gave to any country in the G7, a group of seven rich economies, and is built on the assumption that inflation will rise this year.

A large portion of this inflation will come from increased energy prices for both households and businesses. Higher prices at home will mean Brits are spending more of their wages on energy, while higher prices for businesses will likely be passed onto consumers.

Wages growth at slowest rate since 2021

Pay is growing at its slowest rate in almost six years as wage growth excluding bonuses slumped to 3.6% in the three months to February, down from 3.8% in January, bringing it down to its slowest rate since November 2020.

Wage growth including bonuses was 3.8% in this period, slowing from a rate of 4.1% in the previous three month period.

While wages are growing slower than they were in the previous period, they are still above inflation meaning employees are getting real-terms pay rises.

However, with the Bank of England predicting inflation will reach as high as 3.5% in the third quarter of 2026, it is possible that wages will fall in real terms thanks to the economic disruption expected from the Iran war.

The pain of slowing wage growth and higher unemployment is also unlikely to be alleviated by interest rate cuts, as the Bank of England contends with rising inflation thanks to the war.

The pain of slowing wage growth and higher unemployment is also unlikely to be alleviated by interest rate cuts, as the Bank of England contends with rising inflation thanks to the war.

Morgan at Charles Stanley added: “Under normal circumstances, an economy stuck in a low gear would push the Bank of England (BoE) towards cutting interest rates to support activity.

“Instead, policymakers are likely to keep rates on hold while they assess how higher energy prices feed through into headline and core inflation. For households, this means mortgage costs remain elevated for those on variable rates or coming up for remortgaging compared with just a few weeks ago.”