13 January 2026: Britain’s floundering jobs market braced for further blows

The current state of the UK labour market is a far cry from the boom it enjoyed in the aftermath of the COVID-19 crisis

In the spring and summer of 2022, across the economy, businesses were trying to hire 1.3 million people, by far the highest level since records began and up by 500,000 from the end of 2019.

Unemployment was historically low at around 3.5%, and the number of payroll staff was in the middle of 37 months of consecutive monthly increases, eventually ending in April 2024, the month after former Tory chancellor Jeremy Hunt’s spring budget of that year.

These positive trends have, however, reversed, and many economists think this year could be the one that cracks, if not breaks, the labour market.

There are currently 729,000 vacancies in the country, a 44% decrease from the 2022 peak, while unemployment is up to 5.1%, a near five-year high.

Since the current Chancellor of the Exchequer presented her first budget in October 2024, in which she drastically raised the cost of employment via a £25 billion increase in employer national insurance contributions and a 6.7% rise in the minimum wage, payroll staff numbers have fallen by 187,000.

Over the past decade, the only other decline in payroll staff measured over the 12 months to October was during the pandemic, when it slid by a huge 800,000. Wage growth in the private sector is also down to a five-year low of 3.9% from a peak of over 8%, although real incomes have grown rapidly since Labour came to power 18 months ago, compared to recent history.

As a result, the rise in unemployment under the current Chancellor has been partly driven by people re-entering the labour market. This is considered a good development, as the ONS excludes economically inactive people from its estimate of the joblessness rate.

The labour market has turned a corner since its post-COVID boom, and not in a good way. This was bound to happen. If the strength of worker demand and pay growth had been sustained, it would have created stubbornly high inflation amid weak productivity growth and possibly prevented the Bank of England from cutting interest rates as quickly as it did last year.

The UK economy is showing fresh signs of stagnation, with growth remaining weak and pressure on household budgets persisting.

Official data due later this week is expected to underline how little momentum the economy carried into the end of 2025.

Official figures due on Thursday are expected to show the UK economy grew by 0.2% in November, according to forecasts ahead of the Office for National Statistics’ Gross Domestic Product release.

While this is an improvement on October, when the economy shrank by 0.1%, growth remains weak by historical standards. A Government that celebrates a 0.1% increase in GDP cannot expect to achieve the economic goals it has set itself.

Analysts say continued struggles in manufacturing and construction are holding the economy back, with the services sector expected to post only modest gains.

The picture was already fragile heading into the final months of the year, after the economy expanded by just 0.1% in the third quarter of 2025, raising concerns that the UK is drifting towards stagnation amid persistent inflation pressures.

Economists now anticipate the final quarter of 2025 will produce zero growth overall, a projection that aligns with the Bank of England's latest forecast.

The stagnant finish to the year stands in stark contrast to the first six months, when the Labour government frequently highlighted Britain's superior economic performance compared to fellow G7 nations.

The pound staged a modest recovery yesterday as the dollar was hit by the feud between Jerome Powell and Donald Trump. Sterling rose to a high of 1.3485 and closed at 1.3465.

Donald Trump believes that he can bring his undoubted will, which has served him well in the business world, to bear in the political arena. His fight with Federal Reserve Chair Powell just took a new twist, sending stocks and the dollar lower and lifting gold. A criminal charge against Powell will significantly affect the Central Bank's independence.

Federal prosecutors in the United States have launched a criminal investigation into Federal Reserve Chairman Jerome Powell's testimony to Congress on the $2.5 billion renovation of the US Central Bank's headquarters in Washington, DC.

Powell confirmed the probe on Sunday in a statement posted on social media, hitting back at what he said was pressure from the Trump administration on interest rate policy.

This was the first time Powell had commented publicly on the President's actions, and his post was immediately supported by his predecessor at the Fed, Janet Yellen, and was followed by words of support from every living former Fed President.

During US President Donald Trump's first term and since he returned to the White House one year ago, the pair have clashed repeatedly over Powell's interest rate decisions.

Powell has maintained that the Central Bank must set policy independently, guided by economic data rather than political pressure.

Trump has grown increasingly vocal in his criticism of the Fed's decisions, notably last March, when the Fed held interest rates steady. The president wrote on social media that the Fed would be "much better off cutting rates."

In April's so-called Liberation Day announcement, Trump said lower rates would help the US economy deal with his sweeping new import tariffs on goods from major trading partners.

After calling Powell "stupid" and a "numbskull," Trump went further in July after the Fed still failed to cut rates, saying the policy was "hurting people."

That month, Trump even visited the Fed’s headquarters, the first such trip by a sitting president in decades, which was widely seen as expressing his dissatisfaction with Powell.

Trump also moved against other senior Fed figures, including Fed Governor Lisa Cook, whom he sought to remove over unrelated allegations. The subsequent litigation is awaiting a hearing in the US Supreme Court.

In early June last year, U.S. media reported that Treasury Secretary Scott Bessent had emerged as a front-runner to replace Powell when his term ends this May. He has since downplayed his candidacy.

Other reports suggested that the Trump administration was sounding out a broader list of potential successors.

More recently, the media has focused on four candidates: longtime Trump loyalist Kevin Hassett, former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller and BlackRock executive Rick Rieder.

By the end of 2025, Trump said he would announce Powell's successor this month.

The growing speculation underlined how much pressure the Chairman was facing well before the criminal investigation became public over the weekend.

It appears that Trump will only be satisfied when he has placed a “Clone” of himself at the Fed, although, since the President could cause an argument in an empty room, even that may not bring the result he desires.

The dollar index suffered as investors grew more concerned about Central Bank independence. This is considered vital in both the G7 and the G20 to ensure that monetary policy is used to bring inflation down and promote growth and job creation. One tactic Trump has not yet used is to campaign to change the Fed’s mandate, doing away with the requirement to promote stable prices.

The index fell to a low of 98.67, but recovered to close at 98.90.

Eurozone investor confidence improved to a six-month high in January, a survey conducted by the behavioural research institute Sentix showed and published yesterday.

The Sentix investor confidence rose more than expected to -1.8 in January from -6.2 in December. The score was forecast to increase moderately to -5.1.

The improvement was driven by the expectations index, which rose to +10.0 from +4.8.

Meanwhile, the assessment of the current situation remained subdued at -13.0. Nonetheless, the indicator showed an upward trend, the think tank noted.

Overall, the recovery process remains subdued and does not yet show much momentum, Sentix said. "Therefore, despite this improvement in sentiment, the all-clear cannot yet be given for the economy in the Eurozone."

"In Germany, there is a slight silver lining on the horizon at the start of the year," Sentix said. The investor sentiment index posted -16.4, better than -22.7 in December. Furthermore, this was its highest level since August 2025.

The expectations indicator advanced to +5.5 from -1.3 in the previous month. Although this is a classic turnaround signal, the current situation values remained strongly indicative of a recession.

The current situation index registered -36.0, down from -41.8 in the prior month.

"It therefore remains to be seen whether the investment blockade will be lifted and Germany will regain its footing in 2026," Sentix said.

There will be a six-way bidding war for the ECB vice presidency. Eurozone finance ministers will pick the winner behind closed doors in a secret ballot on Jan. 19.

Current ECB Vice President, Luis de Guindos, announced the nominees yesterday.

Croatia, Estonia, Finland, Latvia, Lithuania and Portugal will face off for the European Central Bank’s No. 2 job, according to a statement from the Council of the EU.

The crowded race for the vice presidency kickstarts a broader battle for a seat on the ECB's coveted six-person executive board, the eurozone's most powerful forum for economic and monetary policy.

Four of the seats, including the presidency itself, will become vacant over the next two years. Competition will be fierce, as the eurozone's largest economies will seek to maintain their influence on the board, leaving smaller countries with fewer seats to fight over.

Northern European States comprise the bulk of the contenders, with Finland’s central banker, Olli Rehn, facing competition from Baltic neighbours.

These include his Central banking peers, Estonia's Madis Müller and Latvia's Mārtiņš Kazāks. Lithuania’s former finance minister, Rimantas Šadžius, completes the Baltic round-up. The other two applicants come from Southern Europe: Portugal’s former Eurogroup president, Mário Centeno, and the Governor of Croatia's central bank, Boris Vujčić.

Rehn and Centeno are considered the favourites for the post, although Kazaks has made his presence felt over the past eighteen months.

Indian Prime Minister Narendra Modi and German Chancellor Friedrich Merz met on Monday in the western state of Gujarat to push for deeper economic and security ties between the South Asian nation and Europe’s largest economy.

Modi and Merz held talks in Gandhinagar, where the two countries signed agreements to enhance cooperation in defence, skill development, health, and education, as both nations seek to reduce dependence on China and bolster economic ties.

After the bilateral talks, Modi noted that Germany is India’s most important trading partner in the European Union and said both leaders were seeking to expand those ties.

The Euro snapped an eight-session losing streak yesterday as the market began to see the merits of reducing the dollar's influence, given Trump’s continued attacks on Central Bank independence.

The common currency rallied to a high of 1.1698 but fell back to close at 1.1665.

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