UK unemployment forecast to reach five year high in 2026

The EY Item Club has issued a warning that UK unemployment is predicted to reach a five year high this year. Forecasts indicate a potential peak of 5.2 per cent in the first half of 2026, reflecting a slight increase from the current 5.1 per cent. This would represent the highest unemployment rate since January 2021.

This anticipated rise in joblessness aligns with modest economic growth, which is being hindered by tax increases announced in the recent budget. The combination of these factors is expected to constrain consumer and business spending.

Companies have already felt the impact of a substantial increase in employer national insurance contributions, amounting to £25 billion last spring. Matt Swannell, Chief Economic Adviser to the EY Item Club, noted that further tax rises may not be anticipated this year; however, previously announced measures will begin to generate revenue. The government will face pressure to reduce borrowing while maintaining stable public spending in order to meet its fiscal objectives.

The EY Item Club has projected GDP growth of only 0.9 per cent for the year, a dip from 2025’s figures. Growth is expected to improve slightly to 1.3 per cent and 1.4 per cent in 2027 and 2028, respectively. While recent tax increases of £26 billion were revealed in the November budget, the majority will not take effect for several years.

Global economic uncertainty and potential tariff disruptions are anticipated to significantly affect private sector confidence and overall growth.

The Bank of England is not expected to lower interest rates at its upcoming meeting; the EY Item Club predicts policy adjustments will not occur until April. Last year saw borrowing costs reduced four times, from 4.75 per cent to 3.75 per cent. Although salaries are projected to increase by 3 per cent this year, living standards growth is likely to experience a slight decline.