UK unemployment unexpectedly falls to 5%

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·4-min read
BIRMINGHAM, ENGLAND - JANUARY 05: : A man wearing a mask walks past a closing down sign in Birmingham during the nationwide lockdown on January 05, 2021 in Birmingham, England. British Prime Minister made a national television address on Monday evening  announcing England is to enter its third coronavirus lockdown of the year. On Monday the UK recorded more than 50,000 new confirmed Covid cases for the seventh day in a row. (Photo by Nathan Stirk/Getty Images)
A man wearing a mask walks past a closing down sign in Birmingham during the nationwide lockdown on January 05, 2021 in Birmingham, England. Photo: Nathan Stirk/Getty Images

The UK's unemployment rate has unexpectedly dipped to 5%.

The Office for National Statistics (ONS) confirmed on Tuesday that the jobless rate was 5% in the three months to January, down from 5.1% in December. Economists had expected the rate to tick up to 5.2%.

“The labour market is showing some signs of resilience in the face of covid-19," said Tej Parikh, chief economist at the Institute of Directors.

"The pandemic has led to an unprecedented rise in job losses, but with continued support from the furlough scheme and the economy now gradually reopening, worst case scenarios are now slowly coming off the table."

The unemployment rate measures the number of economically active people who are out of work and actively seeking new employment. The ONS estimated 1.7 million were unemployed in January.

The claimant count — a more experimental measure that includes all people claiming work-related benefits — rose by 3.3% to 2.7 million. The figure includes furlough payments and is likely to be heavily impacted by the reinstatement of lockdown at the start of January.

Sam Becket, ONS head of economic statistics, said payroll numbers pointed to a continued rebound in jobs in February, although the economy still has 700,000 fewer jobs than prior to the pandemic.

"Of the decrease since then, almost two-thirds has been among the under-25s, over half has been in hospitality, and almost a third has been in London," Becket said.

Despite the dip in headline unemployment, the jobless rate remains near a five-year high. Out-of-work numbers have been rising since the start of last year and began accelerating sharply around May. The unemployment rate has risen by 1.1% over the last 12 months.

Unemployment has risen sharply over the last year. Photo: ONS
Unemployment has risen sharply over the last year. Photo: ONS

The ONS said there had been a slight fall in short-term unemployment but a rise of over 300,000 for long-term unemployment — defined as people out of work for 12 months or more. The number of people out of work for 6 months or more has also risen.

"The increase in those unemployed for over 12 months is driven, in part, by those that briefly stopped looking for work in the earlier stages of the pandemic (and were therefore classified as economically inactive at that time) as they are likely to return to unemployment duration estimates in longer-term categories," the ONS said.

The UK employment rate fell to 75% in January, "driven by decreases in the number of full-time self-employed people and part-time employees," the ONS said.

The economic inactivity rate — those of work age but without and job and not seeking one — rose slightly to 21%.

"Estimates for November 2020 to January 2021 show 8.71 million people aged between 16 and 64 years not in the labour force (economically inactive)," the ONS said. "This was 279,000 more than a year earlier, which was the largest annual increase since February to April 2010."

Average earnings excluding bonuses grew by 4.2% in the three months to January, which was below forecasts but slightly higher than the prior month.

UK chancellor Rishi Sunak said Tuesday's report showed COVID-19 had "caused one of the largest labour market shocks this country has ever faced."

"We have taken decisive action with a £352bn ($487bn) package of support," Sunak said in a statement. “The continued success of the vaccine rollout provides us with hope for the future, and through our Plan for Jobs, we will continue to support people throughout the months to come."

While unemployment remains high, economists have in recent months become more optimistic about the path of the jobs market. At his budget earlier this month, Sunak said the peak of unemployment was expected to be lower than previously feared thanks to the rapid rollout of COVID-19 vaccines and extensive state support for the economy.

"Unemployment will continue to edge up over the year, as cashflow remains challenging, but it is likely to peak lower than expected when the pandemic first took hold," Parikh said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said Tuesday's data showed the UK labour market was "no longer is deteriorating".

"It’s not out of the question that the unemployment rate will fall further over the next six months, given that struggling firms can furlough staff until the end of September, whereas growing firms will be recruiting," he said. "Further ahead, it remains likely that the unemployment rate will rise when the furlough scheme ends."

Private sector economists now expect unemployment to reach 6.2% later this year, according to Treasury forecasts, compared to fears last year that the jobless rate could climb above 8%.

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