Barclays raises UK unemployment rate forecast, labor market becomes more relaxed

Investing.com - In a Friday outlook report, Barclays revised upward its unemployment rate forecasts for the UK in 2026 and 2027 by 0.2 percentage points, now expecting the unemployment rate to peak at 5.4% in the second quarter of 2026.

This upward revision is based on December labor market data, which shows the three-month moving average unemployment rate rising to 5.2%, while the December single-month unemployment rate was 5.4%. PAYE employee tax data indicates a reduction of 11,000 employees in January.

Wage growth slowed in December, with the private sector’s average weekly earnings growth rate decreasing by 0.2 percentage points year-over-year to 3.4%. However, December’s month-on-month growth was strong at 0.6%.

Don’t miss out on rapidly changing market dynamics. InvestingPro provides you with real-time headlines, analyst notes, and live data.

February’s preliminary Purchasing Managers’ Index (PMI) shows an increase in the employment index, but it remains in contraction territory, with the underlying contraction rate easing.

On inflation, the January Consumer Price Index (CPI) inflation rate decreased by 0.4 percentage points year-over-year to 3.0%, while core inflation fell by 0.1 percentage points to 3.1%. The data is slightly above Barclays and Bank of England expectations of 2.9% (for both overall and core inflation).

Despite January data exceeding expectations, Barclays maintains its forecast of an average inflation rate of 2.2% for 2026. The bank has lowered its overall average forecast for 2027 by 0.1 percentage points to 1.9%.

Activity indicators show a strong first quarter. Retail sales in January increased by 1.8% month-over-month, surpassing Barclays’ forecast of 0.7% and market consensus of 0.2%. The preliminary February PMI shows a composite index of 53.9, up from 53.7 in January.

Public sector fiscal data for January show borrowing of £112.1 billion so far this fiscal year, which is £8.3 billion below the Office for Budget Responsibility’s November forecast. January recorded the highest public sector net borrowing surplus since 1993, at £30.4 billion.

Barclays expects the Office for Budget Responsibility’s update to show little change in fiscal forecasts before the Spring Statement on March 3.

The bank notes that the current forecast for the unemployment rate in 2026 is an average of 5.4%, and 5.3% in 2027. Barclays continues to expect GDP growth to accelerate again in Q1 2026 to 0.3% quarter-over-quarter.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.