UK Unemployment Falls to 4.9% Amid Wage Growth Slowdown and Iran War Uncertainty

The UK’s unemployment rate has fallen to 4.9% in the three months to February 2026, according to the latest figures from the Office for National Statistics (ONS). This marks a surprise decline from 5.2% in the previous quarter and represents the lowest level in three months. However, the drop comes alongside a significant slowdown in wage growth, which rose at an annual pace of just 3.6% between December and February – the weakest rate since late 2020.

Despite the fall in unemployment, economists and business leaders warn that the improvement may be temporary. The ONS data covers the period before the full impact of the Iran War began to affect the UK economy, with many firms now facing rising costs and weaker demand. Patrick Milnes, head of people and work at the British Chambers of Commerce, noted that although the unemployment drop was unexpected, businesses anticipate a reversal as the conflict drives up inflation and increases operational burdens.

Yael Selfin, chief economist at KPMG UK, said the labour market “showed signs of stabilising in February, but a reversal may be on the horizon.” She added that unemployment is likely to trend higher in the coming months as firms scale back hiring in response to rising costs and weaker demand. The slowdown in wage growth further suggests businesses are reducing their recruitment efforts and the labour market may start to loosen.

The ONS similarly reported that the number of workers in payrolled employment slipped by 11,000 in March, the first data point covering the period after the Iran War began. Job vacancies have declined across the economy, with early estimates for January to March suggesting a decrease of 29,000 (3.9%) to 711,000 – the lowest level since February to April 2021.

While average pay growth has slowed, wages are still rising faster than inflation. Public sector wage growth averaged 5.2% over the period, compared to 3.2% in the private sector. Pay including bonuses rose by 3.8%, slightly above the base wage growth figure.

Liz McKeown, ONS Director of Economic Statistics, said the number of workers on payroll remained broadly flat in recent periods, reflecting ongoing weak hiring activity. Analysts had largely expected the unemployment rate to remain unchanged at 5.2%, making the actual fall a notable surprise.

The combination of falling unemployment, weakening wage growth, and looming economic pressures from the Iran War has raised concerns about the potential for stagflation – a combination of stagnant growth and rising inflation. This has led to revised expectations for Bank of England interest rate policy, with further cuts now seen as less likely in the near term.

Business groups are urging the government to act swiftly to ease cost burdens on firms, including support for electricity bills and reform of business rates, to help mitigate the impact of the conflict and prevent a sharper downturn in the labour market.

Key Takeaways

• The UK unemployment rate fell to 4.9% in the three months to February 2026, down from 5.2% in the prior quarter.
• Wage growth slowed to 3.6% annually – the weakest pace since November 2020 – though pay still exceeds inflation.
• The ONS data reflects conditions before the full impact of the Iran War, with warnings of rising job losses ahead.
• Job vacancies declined by an estimated 29,000 in the latest quarter, reaching their lowest level since early 2021.
• Business leaders expect unemployment to rise to around 5.5% later in 2026 due to conflict-related economic uncertainty.

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