UK Labour Market Deterioration Summary

Date: 17 February 2026

Author: Kathleen Brooks, Research Director UK

Key Takeaways

• The UK labour market is showing signs of deterioration, with the unemployment rate rising to a five-year high of 5.2%.
• Wage growth has moderated, potentially paving the way for further interest rate cuts by the Bank of England (BOE).
• Concerns arise over whether unemployment will surpass the peak levels seen during the COVID-19 pandemic.
• The British Pound (GBP) has weakened significantly against other currencies.
• Market speculation suggests the BOE may intervene with rate cuts to stimulate the economy.
• There are ongoing concerns regarding the impact of artificial intelligence on the job market.

Labour Market Overview

The latest employment data indicates a weak end to 2025 for the UK labour market. The unemployment rate has increased to 5.2% for the three months ending in December, marking the highest level since 2021. This rise in unemployment heightens the likelihood of the BOE implementing rate cuts, with market expectations now pricing in two cuts for 2026.

Wage Growth Trends

Wage growth has also shown signs of moderation. Private sector pay growth was reported at 3.4%, the lowest in five years, while public sector wage growth decreased slightly to 4.2%. The ONS attributes the elevated public sector wage growth to significant pay awards made in early 2025, although this effect is beginning to wane.

Future Unemployment Projections

The increase in unemployment is concerning, as it approaches the 5.3% peak recorded during the COVID-19 pandemic. The BOE anticipates that unemployment may peak at this level in Q2 and remain elevated. There are fears that the unemployment rate could exceed this estimate, particularly as hiring costs rise and advancements in AI technology impact the labour market.

Currency Market Reaction

The market's reaction to the labour data has been immediate, with the GBP falling sharply. The GBP/USD exchange rate has dropped by 70 points, losing the $1.36 handle and becoming the weakest currency in the G10 FX space. Analysts suggest that the pound is vulnerable to further declines, with key support levels identified at $1.3525 and $1.3445.

Bank of England's Potential Response

UK bond yields have been trending lower, reflecting the deteriorating economic outlook. The latest data could exert additional downward pressure on yields, with an 80% probability of a rate cut in March and potential further cuts in June or July. The upcoming Consumer Price Index (CPI) report is expected to bolster calls for BOE intervention as inflation rates moderate alongside a weakening labour market.

Market Sentiment and AI Concerns

Overall market sentiment appears downbeat, with global equity futures declining. However, the FTSE 100 is expected to rise. Attention will be focused on whether the so-called "AI scare trade" continues to affect sectors perceived as vulnerable to AI advancements.

Conclusion

The current state of the UK labour market raises significant concerns for policymakers and investors alike. With rising unemployment and moderating wage growth, the BOE may need to take decisive action to stimulate the economy and support the labour market.