UK unemployment rate to hit 5 per cent next year executes market move in market

UK Unemployment Set to Rise Amid Economic Headwinds

Deal Background

According to the latest forecast from EY ITEM Club, the UK’s unemployment rate is expected to rise to 5% in early 2026 before falling back to 4.7% by 2027. This projected increase in joblessness comes amid a broader economic slowdown, with the report also predicting more modest GDP growth and continued high inflation over the next year.

Motivations and Implications

The primary driver behind the anticipated rise in unemployment appears to be the impact of the Chancellor’s £25bn hike in national insurance contributions (NICs), which has reportedly cooled hiring levels and forced companies to cut payroll costs through redundancies. Additionally, the report cites global trade disruption and high interest rates as factors that are expected to “put a brake on economic momentum” and limit growth.

Sector and Market Signals

• GDP growth forecast upgraded to 1.5% in 2025, but expected to slow to 0.9% in 2026 and 1.3% in 2027
• Business investment forecast upgraded to 3.7% in 2025, but expected to slow to 0.8% in 2026
• Inflation predicted to remain above the Bank of England’s 2% target throughout the next 12 months

Implications for Private Equity

The projected rise in unemployment and more modest economic growth could present both challenges and opportunities for private equity firms operating in the UK market. On one hand, higher unemployment may lead to increased availability of talent and potentially more attractive acquisition targets. However, the combination of tax hikes, trade disruption, and high interest rates could also dampen investment activity and limit the ability of portfolio companies to grow and expand.

Immediate Outlook

The report suggests that the UK government may need to introduce “almost immediate” changes to taxes and spending in order to address the anticipated £30bn fiscal shortfall. While these measures could be balanced with supply-side growth initiatives, the overall economic environment is expected to remain challenging in the near term.

Key Takeaways

• UK unemployment rate forecast to rise to 5% in early 2026 before falling back to 4.7% by 2027
• Economic growth and business investment expected to slow amid tax hikes, trade disruption, and high interest rates
• Challenging environment may present both opportunities and challenges for private equity firms in the UK market

Sources

• City AM – London