The UK’s economic outlook is looking increasingly bleak, with unemployment poised to climb to levels not seen in more than a decade, according to a new analysis from the Resolution Foundation think tank.
In its analysis of Chancellor Rachel Reeves’s Spring Statement, the think tank highlights how recent disappointments in growth and rising joblessness are setting the stage for a tougher labour market ahead.
The Office for Budget Responsibility (OBR) has already noted that unemployment came in higher than expected at the end of last year, and the think tank warns that this trend is likely to persist, pushing rates to their highest point since the early 2010s.
Back in November 2025, the OBR expected unemployment to inch up to 4.9% in Q4 2025, and to peak at 5% in Q1 2026. But unemployment reached 5.2% in Q4 2025, and so the OBR has joined the Bank of England in shifting to a more pessimistic outlook in the near term, expecting unemployment to peak at 5.33% in Q3 2026.
This would be a fraction higher than the peak recorded during the pandemic (5.3%) and is otherwise the highest unemployment rate witnessed in more than a decade.
A downgrade to growth
This grim projection comes amid a broader downgrade to the UK’s growth forecasts for 2026. The OBR assumes a period of weaker expansion this year, followed by a modest catch-up later, but external shocks, like the escalating war in the Middle East, are adding layers of uncertainty.
The conflict, which spread rapidly after the OBR finalised its main forecasts, has already driven up energy prices and borrowing costs, potentially exacerbating inflationary pressures and dragging on household incomes.
“Unemployment has increased steadily over the past year, consistent with sluggish GDP growth as well as increases in labour costs in 2025,” the report notes, pointing to factors like the hike in employer National Insurance Contributions.
Young people have been hit hardest, as is typical in downturns, with the think tank urging the government to bolster support for young jobseekers and avoid further labour cost increases that could worsen the situation.
Some silver linings
Despite these headwinds, the Chancellor has managed to navigate her fiscal rules with a slightly improved margin, thanks to lower borrowing costs (prior to the recent market jitters) and stronger tax receipts from areas like Capital Gains Tax.
If no action had been taken, net borrowing would have fallen by £10.2 billion in 2029-30. However, adjustments including £4.1 billion for special educational needs and concessions on Inheritance Tax have eaten into much of that windfall.
The report also underscores the human cost of the sluggish economy. Living standards for working-age families are set for a rebound in the coming financial year, driven by benefit reforms like the abolition of the two-child limit, which could lift 480,000 children out of poverty, but stagnation is expected to return thereafter.
Typical incomes in the bottom half could rise by 3.9% (£800) in 2026-27, but then fall by 0.5% (£150) over the final two years of the Parliament.
Adding to the risks, net migration is falling faster than anticipated, which could hit public finances if it continues. And looming large is the Prime Minister’s hint at ramping up defence spending to 3% of GDP, which, combined with stabilising education and health budgets, could require an extra £13 billion for other public services.
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