Economic data for March point to a more cautious tone among UK employers after the start of the Iran war, with a measured decline in hiring activity and the fewest advertised vacancies in nearly five years, official figures published on Tuesday show.
Average weekly earnings, excluding bonuses, rose by 3.6% in the three months to February compared with the same period a year earlier, down from a 3.8% increase in the three months to January, the Office for National Statistics reported. That moderation was slightly less pronounced than economists polled by Reuters had largely expected, with the median forecast calling for growth of 3.5%.
Those wage numbers are closely watched by the Bank of England as it evaluates inflationary pressure on the economy, particularly after investors and policymakers alike noted a jump in energy prices linked to the Iran war. Officials at the central bank have signalled that the labour market is softening, but they continue to monitor wage trends to gauge whether inflationary momentum could re-emerge.
Vacancies and employer sentiment
The labour market showed further signs of cooling when measured by advertised roles. Vacancy levels fell to 711,000 in the three months to March, down from 721,000 in the prior three-month period and marking the lowest reading since the three months to April 2021. That retreat in posted jobs suggests employers are responding to heightened uncertainty following the onset of the Iran war.
"Big picture, we do not think today’s data will alter the BoE’s image of the labour market," said Sanjay Raja, chief UK economist at Deutsche Bank. He added that "the UK labour market is not out of the woods yet," capturing concern that underlying fragility persists even as some indicators show only gradual change.
Commenting on the contrast with the 2022 energy shock, Yael Selfin, chief economist at KPMG UK, said the current state of the labour market is weaker, which she said constrains workers' bargaining power and reduces the likelihood of a wage-price spiral. That assessment underscores how a softer jobs market may dampen sustained inflation pressures even as energy costs climb.
Payrolls, inactivity and the surprise drop in unemployment
Early payroll numbers from the tax authority - data that are subject to revision - reported a small decline of 11,000 in March following a revised drop of 6,000 in February. Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, cautioned that the initial March payroll estimate has a good chance of being revised upward, and that on balance the data suggest the labour market is not loosening as sharply as some had feared.
Economists were surprised by a marked fall in the headline unemployment rate to 4.9% from 5.2% over the three months to February. Reuters' poll of economists had pointed to no change. The Office for National Statistics said the decline in the jobless rate reflected a 169,000 increase in the number of people classed as inactive - those out of work and not seeking employment - over the period, while employment itself rose by 24,000.
More than three-quarters of the increase in inactivity among 16-64 year-olds was driven by students not looking for work, the ONS data showed. That demographic shift helped reduce the measured unemployment rate even as broader signs of employer caution emerged.
Inflation, markets and policy implications
Inflation figures for March, due on Wednesday, were highlighted as potentially more important for the Bank of England's near-term policy stance. The Reuters poll pointed to consumer price growth of 3.3% in March, up from 3.0% in February.
Market pricing moved on Tuesday to reflect slightly higher odds of further tightening by the Bank of England. Investors placed 36 basis points of rate hikes in the year ahead into pricing - the equivalent of between one and two quarter-point increases - up from 30 basis points on Monday.
Bank of England Governor Andrew Bailey has said the central bank should keep a clear eye on risks not only to inflation but also to growth and jobs when it makes its next decision on interest rates. In contrast, the central bank's chief economist Huw Pill has stressed that keeping inflation under control remains the primary objective and has criticised his colleagues' "wait-and-see" messaging.
What the data leave unclear
The March dataset points to a shift in employer behaviour at a time of external shock from the Iran war, but it also contains mixed signals. Wages have moderated only modestly; vacancies have fallen to multi-year lows; unemployment has declined, partly because more people - notably students - are not seeking work; and early payrolls showed a small drop that may be revised. These contrasting elements mean policymakers and markets face genuine uncertainty in assessing the next move for interest rates.
Overall, the dossier of recent labour market indicators suggests increasing caution among employers amid higher energy costs tied to the Iran war, while giving the Bank of England a nuanced set of facts to weigh as it judges inflationary risks against prospects for growth and jobs.