UK businesses cut vacancies and wages amid Iran war impact
The UK labour market has begun reacting to a geopolitical shock. In March, companies reduced hiring activity, while job vacancies fell to their lowest level in nearly five years, according to Reuters. Wage growth also slowed significantly. Early effects of the conflict with Iran have increased business caution, with firms factoring in higher costs and economic uncertainty in their decisions.
Decline in UK job vacancies
In the first quarter of 2026, job vacancies dropped to 711,000, the lowest level in almost five years. The labour market is cooling, but the decline is gradual rather than a sharp downturn. In February, payroll employment fell by 6,000. In March, the decline accelerated to 11,000, according to data from the Office for National Statistics and HMRC.
Economists link this trend to rising uncertainty and increased caution among companies amid external shocks and higher costs. The labour market still remains relatively resilient, with expectations of recovery depending on geopolitical developments.
UK wages slow down
Income growth continues to ease. In the fourth quarter of 2025, total annual wage growth in the UK slowed to 3.8%. Growth over the three months to February stood at 3.6%, the lowest level since November 2020, during the pandemic. Adjusted for inflation, which is often used as a proxy for living standards, real growth is estimated at just 0.2%. Including bonuses, wages rose by 3.8%, down from 4.1% in the previous quarter, The Guardian reports.
Wage dynamics remain a key indicator of inflation pressure. The Bank of England is closely monitoring labour market conditions to assess how income growth may sustain inflation in the economy. KPMG UK chief economist Yael Selfin notes that the current situation differs from the 2022 energy shock. The labour market is now weaker, limiting workers’ bargaining power and reducing the risk of a wage-price spiral.
Paradox of falling unemployment
The UK unemployment rate fell to 4.9% from 5.2% in the three months to February, according to the Office for National Statistics. Economists did not expect such a shift and say it is only partly linked to job creation.
The number of economically inactive people rose by 169,000 over the same period. Students accounted for more than three-quarters of this increase among people aged 16–64. Employment rose by 24,000. At the same time, payroll employment declined by 65,000 compared with March 2025.
Caution over energy risks
Deutsche Bank UK chief economist Sanjay Raja says there is still no reason for excessive optimism, despite some improvement in unemployment figures. The overall picture remains mixed, with signs of weakness persisting.
RSM chief economist Thomas Pugh considers a repeat of the 2022 energy-driven wage shock unlikely. He expects interest rates to remain broadly stable unless inflation accelerates significantly. However, weaker wage growth may make the cost of living more noticeable for households.
International Investment analysts note that the UK economy remains highly sensitive to energy price fluctuations. The conflict in the Middle East has increased volatility in commodity markets and raised costs, prompting companies to remain cautious on hiring and investment. External risks tied to energy markets and broader economic uncertainty remain the main pressure points for businesses, alongside ongoing restructuring in parts of the economy.