UK Unemployment Reaches 4-Year High
UK unemployment climbed to 4.6% in the three months to April 2025, marking a four-year high and highlighting the stress mounting in the labour market following a series of significant policy shifts. The increase came amid the implementation of a steep rise in payroll taxes—specifically an increase in employer National Insurance Contributions (NICs)—and a 6.7% hike in the National Living Wage, bringing it to £11.44 per hour. These changes, part of the government's broader fiscal tightening agenda, were aimed at boosting public revenues and improving living standards but appear to have had unintended contractionary effects on hiring, particularly in lower-margin sectors such as hospitality and retail. Simultaneously, wage growth (excluding bonuses) slowed to 5.2%, its lowest rate since September 2023, suggesting that labour demand is weakening.
In May alone, UK payrolls fell by 109,000—the sharpest drop since the COVID-19 pandemic in 2020—building on an earlier 55,000 decline in April. The vacancy count dropped to 736,000, its lowest level since early 2021. These figures paint a picture of a cooling economy, reinforcing expectations that the Bank of England may move to cut interest rates in August to mitigate the downturn. The data has intensified political pressure on the Labour government to reconsider its tax-heavy approach to fiscal consolidation amid rising business discontent.
Base Case: Gradual Stabilisation - 60%
Unemployment peaks at 4.7% in Q3 2025 before easing to 4.4% by end-2026. The Bank of England cuts interest rates twice (August, November), while the government maintains payroll taxes but introduces limited SME relief. Wage growth slows to 4.2% as inflation cools, and monthly payroll gains recover moderately in early 2026. GDP grows at a subdued 1.2%, with hiring stabilising but not accelerating. Fiscal pressure eases slightly but remains politically sensitive.
Upside Case: Policy-Led Rebound - 20%
Stronger-than-expected policy responses drive a faster recovery. The BoE cuts rates three times by early 2026, and the government rolls back part of the NIC hike while launching infrastructure spending. Unemployment dips to 4.0% by late 2026; wage growth holds at 4.5%, supported by robust hiring. Payrolls grow by over 75,000 per month in 2026. GDP expands by 1.8%, and business and consumer confidence rise sharply. The Labour government gains political momentum heading into the next cycle.
Downside Case: Prolonged Weakness - 20%
Policy inaction and sticky inflation delay rate cuts, while taxes remain unchanged. Unemployment rises to 5.2% by early 2026 as job losses persist. Wage growth drops to 3.2%, and hiring stagnates. Vacancies fall below 700,000. GDP slows to just 0.4%, with real incomes and consumer spending under pressure. The government faces political backlash and recession risks grow, particularly in low-wage and service-heavy sectors.
