Unemployment to rise above pandemic peak, economists warn

Economists at JP Morgan have predicted that the jobless rate will rise to 5.5 per cent in the first half of the year, equating to more than two million people.

This peak compares with a previous high of 5.3 per cent in December 2020.

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It comes as businesses are reluctant to hire staff after Rachel Reeves’s £25bn hike in employers’ National Insurance contributions kicked in last April, while the advance of artificial intelligence has also stagnated job opportunities.

"Over a year has passed since the tax hike and the jobs market is still stagnating," said Allan Monks, the chief UK economist at JP Morgan.

"Sectors which may be more exposed to AI adoption (eg business services and finance) continue to look relatively weak."

Despite the bleak outlook, Mr Monks believed employers would regain their confidence and start hiring later this year.

But if this does not happen, unemployment "would be expected to continue rising towards 6pc by year-end".

Unemployment hit 5.2 per cent at the end of 2025, with people aged between 16 and 24 hit hardest as the rate rose to 16.1. per cent, the highest level in more than a decade.

Young workers are typically more affected by the NI hikes and increases in minimum wage, which risk "pricing them out of the market", the National Institute of Economic and Social Research said.

Mr Monks believed the Bank of England would be forced to cut interest rates at a faster rate if the weaker job market persisted.

He predicted two more reductions by June to 3.25pc from the current level of 3.75pc, which was held by the Bank in a knife-edge vote at their latest meeting earlier this month.

Alan Taylor, a Bank rate-setter who voted for an immediate cut to 3.5pc, believed that “two to three” more cuts were needed to support the economy, which he warned was on a “weaker path”.

“We also have seen in this forecast – and over time – a weaker path for the economy in terms of the output gap and unemployment,” he told an event in the City on Monday.

The Office for Budget Responsibility is poised to unveil its latest economic forecasts next week.