The United Kingdom’s unemployment rate unexpectedly turned higher, as the International Monetary Fund warned that the war in the Middle East is dampening near term growth prospects.



The rate climbed to 5%, above expectations of 4.9%, for the three months ending in March, the UK's Office for National Statistics said today. Average weekly wage growth, excluding the effects of bonuses, stood at 3.4% in the three months to March, according to the ONS. That is down from 3.6% in the previous period.



&#34;These figures signal a growing distress within the UK's labor market as soaring labor costs and the fallout from the Iran war drive more businesses to reduce recruitment and limit pay awards,&#34; Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said. &#34;The UK is on the cusp of a perilous jobs crunch.&#34;



The “hit on businesses from skyrocketing energy costs and declining customer demand amid the Iran conflict&#34; is the catalyst, Thiru said. Joblessness could rise to close to 6% this year, he added. 



<figure class="wp-block-image"><figcaption>Source: ONS</figcaption></figure>



The British economy faces internal and external headwinds. Political uncertainty after local elections on May 7 has undermined confidence in the UK economy. Prime Minister Keir Starmer is on the brink of resigning after the Labour Party's historic losses.



&#34;Latest figures suggest the labor market remains soft, with vacancies at their lowest level in five years,&#34; Liz McKeown, Director of Economic Statistics, ONS, said. &#34;The number of payroll employees continued to fall in the three months to March, while regular wage growth slowed further.&#34;



Estimates for payrolled employees in the UK fell by 104,000, or 0.3% year-on-year, in March, ONS data showed. Hospitality and retail saw the largest falls in vacancies and payroll numbers, according to McKeown.



<h2>IMF Warns of Economic Slowdown</h2>



The International Monetary Fund (IMF) said on Monday that war in the Middle East had dampened near-term economic prospects. The IMF upgraded its 2026 forecast for the UK to 1%, up from the 0.8%in its April World Economic Outlook.



The revision reflected stronger-than-expected pre-war momentum, including data revisions and a robust first-quarter. The growth represented a slowdown from the 1.4% in 2025.



&#34;Weakness has been particularly concentrated in consumer-facing sectors most affected by last year's tax and minimum wage hikes,&#34; James Smith, Developed Markets Economist, UK, ING, wrote today. &#34;That pressure is only likely to be exacerbated by the incoming energy shock.&#34;



The war would affect the UK through higher energy prices, shipping costs, and financial market uncertainty, the IMF said. The Washington-based fund has projected that headline inflation will peak at just below 4% in 2026. That is well above the Bank of England's 2% target.



International benchmark Brent crude futures increased about 80% year-to-date, closing above $110 a barrel on Monday.



<figure class="wp-block-image"><figcaption>Brent crude, year to date, source: Trading View</figcaption></figure>



<h2>Shipping Disruptions Elevate Power Prices</h2>



Shipping disruptions through the Strait of Hormuz accelerated UK inflation to 3.3% in March, the highest reading in three months. The ONS will release the latest inflation data on Wednesday, with analysts forecasting a reading of 3%.



UK energy bills will rise by £209 to £1,850 a year for a household from July, Cornwall Insight forecast. The main driver for the increase is higher ⁠wholesale prices, Reuters reported.



They climbed in February and March after U.S. ​and Israeli missile strikes on Iran. Iranian attacks ​that damaged Gulf energy infrastructure and triggered the closure of the Strait pushed energy prices higher. 



The disruptions through the Strait, which accounts for about 20% of the world's energy supplies, will hit British growth. BGDP expanded just 0.3% month-on-month in March, slowing from 0.4% in February.



<h2>External, Internal Shocks Collide</h2>



The UK faces &#34;domestic uncertainty&#34; as these external shocks collide with internal political uncertainty. 



Prime Minister Keir Starmer is reportedly on the brink of resignation after Labour's catastrophic performance in the May local elections. Nearly 100 Labour MPs have called for Starmer to go.



The party lost nearly 1,229 council seats and saw its vote share collapse by an average of 18 percentage points. Reform UK, riding a wave of anti-establishment anger, emerged as the dominant force with over 1,454 seats gained.



Political analysts suggest that Starmer's time as prime minister is hanging by a thread. Political risk consultancy Eurasia Group raised the probability of Starmer being ousted this year to 80%, up from 65%.



<h2>Forex Market Reacts</h2>



Forex markets responded as investors processed the disappointing unemployment data. The pound slipped against the dollar to about $1.34 and is down about 1.3% in the past three months.



<figure class="wp-block-image"><figcaption>Three-month GBP rate against USD, source: Trading View</figcaption></figure>



Earlier in the year, markets briefly priced in two rate hikes. The latest view is that the Bank of England (BoE) is more likely to leave rates unchanged, Reuters reported. The central bank kept its bank rate unchanged at 3.75% in April.



BoE policymakers said that the Middle East conflict has disrupted transportation and pushed up households' motor fuel costs. The BoE expects energy price rises to &#34;have knock-on effects&#34; as businesses increase prices and workers ask for higher wages.



&#34;The main risk is a prolonged war in the Middle East, resulting in higher energy and food prices for an extended period, and sustained global market volatility,&#34; the IMF said. &#34;Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions.&#34;



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The UK's unemployment rate rose to 5%, exceeding expectations, as the IMF warned that the Middle East war is dampening growth prospects. Average wage growth slowed to 3.4%, and job vacancies hit a five-year low. Political uncertainty following local elections adds to economic challenges, with Prime Minister Keir Starmer facing pressure to resign. The IMF projects inflation to peak below 4% in 2026, driven by rising energy costs due to geopolitical tensions. The pound has weakened against the dollar amid these developments.

- The UK's unemployment rate unexpectedly rose to 5%, exceeding expectations, as ongoing Middle Eastern conflicts hinder economic growth.  
- The IMF warns that the war's impact will lead to higher energy prices and uncertainty in financial markets, with a projected inflation peak near 4%.  
- Political instability following local elections adds to economic concerns, with Prime Minister Keir Starmer facing uncertainty over his leadership.

UK Unemployment Hits 5% And Wages Slow As Middle East War Pushes Energy Bills Higher