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Economists see worrying signs in new unemployment data

UK unemployment could peak at more than 5% next year (Philip Toscano/PA)
UK unemployment could peak at more than 5% next year (Philip Toscano/PA)

A small rise in the proportion of unemployed people in the UK could be a sign of worse things yet to come, economists have warned.

Official data released on Tuesday showed the UK’s unemployment rate increased by 0.1 percentage points to 3.8% in the three months to June.

It is the first increase in the measure for 17 months as companies have been desperate for staff.

After the data was released, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said unemployment is set to rise sooner than forecasted by experts at the Bank of England.

Demand for workers is starting to stabilise, and more people are coming into the jobs market, he said.

“The unemployment rate is no longer falling and the timeliest indicators suggest that it will start to rise far sooner than the BoE anticipates,” he said.

“Labour demand is stabilising just as labour supply is picking up.”

He said that 195,000 people entered the jobs market in the three months to June, an increase of 0.6%. It is three times higher than the average over the 2010s.

He added: “This strong growth also did not deplete the number of people who are technically inactive but would say that they would like a job, which actually increased.”

Ellie Henderson, an economist at Investec, said that companies are still clearly struggling to get enough staff as the market remains tight.

“Although labour market conditions are clearly extremely tight, these headline numbers suggest a modest loosening in conditions,” she said

“Given this continued strong demand for labour, a major influence behind the extent of any potential loosening in conditions is the pool of available labour.”

She said that economists were surprised by how many people are considered “inactive” in the UK.

“Considering the current cost of living crisis and wealth of jobs on offer one might expect an increase in activity as people are enticed people back to the labour force after the mass-exodus at the start of the pandemic,” she said.

But the economic inactivity rate increased 0.3 percentage points in the three months to June.

She expects unemployment peaking at 5.3% next year, in the second quarter. It is 3.8% today.

A rise in unemployment is likely to be even more painful for those impacted as the cost of living soars at a rate not seen for 40 years.

The Bank of England has forecast that Consumer Prices Index inflation (CPI) will soar to 13.3% in October this year as energy bills are jacked up.

Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown, said: “Already it seems companies are being more cautious in their hiring, with a recession set to take hold in the UK amid the energy crisis, with consumers struggling to pay mounting bills.

“There is little in the way of help from higher pay packets with wages dropping even further behind inflation in the year to June.”