Labour market still weak despite some positive notes

Danni Hewson, Head of Financial Analysis at AJ Bell, assesses a UK labour market still under strain as unemployment remains at a five-year high and private-sector pay growth slows sharply. While softer wages may ease inflation concerns for the Bank of England, she warns that fragile retail and hospitality sectors and looming tariff risks could yet stall any tentative economic recovery.

Danni Hewson, AJ Bell head of financial analysis, comments on the latest UK jobs figures:

“The engine powering the UK’s labour market is still spluttering, with unemployment sticking at a five-year high, wage growth under pressure, especially in the private sector, and the number of people on payroll falling significantly in the final months of 2025. 

“Unsurprisingly the retail and hospitality sectors have shouldered significant strain following increases to the cost of labour and uncertainty amongst consumers in the run up to last year’s Budget. The typically ‘golden’ quarter for those sectors looked a little tarnished with many shops, bars and restaurants scaling back their traditional hiring plans as they took stock of sentiment in the run up to Christmas. 

“But there are a few positives to latch onto, the first being that slowing wage growth provides a more benign backdrop for Bank of England rate setters worried about how sticky inflation might continue to be throughout the year.

“Secondly, after 39 consecutive quarterly declines in vacancy numbers, things seem to have bottomed out and there are tentative signs the UK economy might be turning a corner. But nerves about the potential impact of any fresh tariffs could derail the momentum evident in November’s economic growth numbers, with many exporters watching events over the next few weeks very closely.

“The frail retail and hospitality sectors will be hoping the government’s pledged business rate U-turn for pubs might extend further as they face up to another year of rising costs.”