18 February 2026: The UK economy is ’emitting a distress signal’ amid weak figures for jobs and wage growth

Private sector pay increased on average by just 3.4% in December, according to the latest official labour market data released yesterday, the same as the rise in inflation at the end of last year.

The vast majority of workers are feeling the winter blues. Their incomes, adjusted for rising shop prices, have flatlined, leaving them no better off than they were a year earlier.

The most recent surveys of consumer confidence reveal a dismal picture: households worried about growing debt and shrinking savings, now that their incomes have flatlined.

There is also the looming threat of redundancy, or, more likely, rival firms blocking hiring, which forces workers to stay in their current, possibly poorly paid jobs.

Unemployment rose to a fresh five-year high of 5.2% in the three months to December 2025, the Office for National Statistics said, reflecting a reluctance among employers to hold on to staff with little to do, in the hope of better times, or hire new people.

The rise in the minimum wage, employers' national insurance contributions and other red tape introduced by this Government has seen youth unemployment, that is, those below the age of 25, rise to 16.1% over the past three months.

Young people who have completed their education, often up to degree level, are increasingly finding it difficult to secure employment. At the same time, those who left school at 16 are at risk of becoming part of a lost generation.

Alan Milburn, a former cabinet minister and part of the firmament of Blair-era Labour grandees, has been tasked by Sir Keir Starmer with investigating the soaring number of young people aged 16-24 who are not in education, employment or training, known as Neets. Their number is just under one million, equivalent to one in eight young people, and Milburn says it is a moral, social and fiscal crisis, a lost generation that faces a life on benefits.

Milburn says that the social contract, “an almost implicit promise in society that each generation would do better than the last generation,” is being broken.

Two-thirds of Neets are “economically inactive”, meaning they are not even looking for work. The consequences, Milburn says, are profound for them and Britain as a whole.

“That has a long-term scarring effect for life,” Milburn says. “If you’re not working in your twenties, you’re probably not going to be working in your thirties, your forties, your fifties, and that exacts huge consequences. I think too much of the debate around this has been framed as a fiscal problem.

Critics warn that the increase is the latest sign that the jobs market is continuing to deteriorate.

The figures released yesterday will come as a blow to the Chancellor, who has pledged to improve opportunity and rebuild the economy.

The 5.2% unemployment rate is up from the previous 5.1% reading in November, with the number of pay-rolled employees in the UK falling by 121,000 (0.4%) last year.

Reacting to the figures, ONS Director of Economic Statistics Liz McKeown said: “The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month.

"Over the same period, the unemployment rate increased, with data showing that more people who were out of work are now actively looking for a job.

“The number of vacancies has remained broadly stable since the middle of last year. Alongside rising unemployment, the number of unemployed people per vacancy has increased to a new post-pandemic high.

"Meanwhile, redundancies are also showing an upward trend.

The economic indicators reveal significant shifts in inflationary pressures and labour market conditions, providing crucial signals for the Bank of England’s monetary policy trajectory.

According to the analysis, softer inflation readings combined with evolving employment data create a complex landscape for interest rate decisions in the coming quarters. These developments follow months of economic uncertainty and represent potential turning points for UK monetary policy.

The Bank of England’s Monetary Policy Committee faces challenging decisions amid these economic developments. The Central Bank must balance several competing considerations.

Inflation remains above the 2% target but shows clear downward momentum. Labour market conditions suggest reduced wage pressure but still indicate tightness relative to historical averages. Financial markets are now pricing in two 25-basis-point cuts in the base rate this year, the first by the end of April.

The pound lost significant ground as traders looked forward to rate cuts following the poor data. It fell to a low of 1.3496, but rebounded to close at 1.3462.

Federal Reserve of Chicago President Austan Goolsbee is not a voting member of the FOMC in 2026, but is still the go-to person for a “quotable quote” by the financial press.

The U.S. Federal Reserve could approve "several more" interest rate cuts this year if inflation resumes a decline to the central bank's 2% target, Goolsbee said yesterday, downplaying a recent weak consumer price report as masking strong service price increases.

Consumer price inflation for January was cooler than expected at 2.4%. Still, Goolsbee said he partly discounted the result because it was influenced by high inflation readings from early last year that had been excluded from the comparison. Services inflation, meanwhile, was "not tamed," running at a higher 3.2% annual rate last month.

"If we can show that we're on a path to 2% inflation, I still think there are several more rate cuts that can happen in 2026," Goolsbee said on CNBC. "But we've got to see it" in the coming data.

The Fed held its policy rate steady in the 3.5% to 3.75% range at its January meeting, and is expected to do so again at the next meeting on March 17-18.

Recent data has left the Fed in something of a holding pattern. Job growth in January was a stronger-than-expected 130,000, and the unemployment rate fell slightly to 4.3%, alleviating some concern that the labour market was about to falter and undercutting one argument for immediate rate reductions.

The return of inflation to the 2% target, meanwhile, remains a work in progress, with many policymakers still worried that faster-than-desired price increases are at risk of becoming embedded, a reason to keep rates where they are.

Minutes of the Fed's January meeting will be released later today and may provide more detail on the depth of that concern while the Fed awaits the transition to a new chair. Before that, durable goods orders and housing starts will keep traders occupied.

President Trump has nominated former Fed Governor Kevin Warsh to lead the central bank when current Chair Jerome Powell's term ends in May, and investors do not expect a change in rates until the June 16-17 Fed session, which Warsh would lead if confirmed by the Senate in time.

Should rates be cut at that meeting for the first time in well over a year, it will set the tone for Warsh’s Chairmanship.

San Francisco Fed President Mary Daly believes that the Fed must remain nimble in the coming months. She told reporters that “we are currently in a low hire, low fire” situation with inflation running at above target. That could shift to a no-hiring, more-firing situation very quickly, and the FOMC must be prepared to act, as we must be reactive to the situation as we see it.

In general, Fed Presidents appear to have a more simplistic view of the economy than their colleagues who run departments at the Federal Reserve in Washington.

The dollar index made minimal gains yesterday, but quickly ran into selling pressure. It reached a high of 97.54, but sellers quickly emerged, driving it back to close at 97.11, just two pips higher on the day.

In the race to succeed Christine Lagarde, the question of when leaders will choose the next European Central Bank President looms almost as large as who they pick.

That’s a key lesson from the resignation of Bank of France chief Francois Villeroy de Galhau, whose early exit announced last week automatically means the selection of his replacement falls to Emmanuel Macron, rather than to his replacement, who may well come from the far right of French politics.

Like Lagarde, the Governor was meant to leave office in October 2027, which would probably give the choice of successor to the next Head of State after elections in the first half of next year.

That same winner will weigh in on the selection of the ECB chief, unless Europe’s leaders speed up their decision-making.

The European Union is not designed to make quick decisions or rapid pivots. Still, it faces a uniquely critical situation if it does not want to lurch significantly to the right.

“There are good reasons to make decisions before the French elections,” said Emanuel Moench, a professor at the Frankfurt School of Finance and a former Bundesbank official. “It would certainly be easier with Macron than with Le Pen or Bardella, who have already signalled that they have very different ideas about what the role of the ECB should be.”

Whether governments see the need to act quickly to shield the Central Bank and their perception of any threat to the European Union's functioning posed by the rise of France’s far-right National Rally are crucial to the choreography of one of the most consequential personnel decisions confronting the region.

Eurozone industrial production fell by 1.4% month-on-month in December but still grew by 1.2% on a year-on-year basis. The month-on-month decline was largely expected, given that the recently published German and French figures were weak.

It is easy to be downbeat about the prospects for Eurozone industrial growth, as structural headwinds remain important. Natural gas prices are still more than three times as high in Europe as in the US, and cheap Chinese exports to Europe continue to grow at a strong pace. At the same time, European exporters still face higher import tariffs in the US.

In the January business sentiment survey from the European Commission, the assessment of export orders remained downbeat, but overall orders improved. This suggests that domestic demand in the eurozone is starting to pick up, with German stimulus plans likely to be a key driver. Indeed, German industrial orders climbed nearly 20% in the last four months of 2025.

There are also signs that the inventory correction is largely over, with stock assessments now close to the historical average. Therefore, analysts expect manufacturing to contribute positively to eurozone growth this year, even though the structural issues are far from resolved.

Leading on from this more optimistic climate, the Association of German Chambers of Industry and Commerce (DIHK) has raised its 2026 growth forecast for the German economy from 0.7% to 1%.

The upgrade was primarily due to statistical and calendar effects, while the association warned that despite slight improvements, structural problems are hindering a sustainable recovery.

In contrast, Europe's largest economy is struggling to gain momentum due to geopolitical uncertainties, high operating costs, and weak domestic demand, according to DIHK, even as energy prices continue to fall.

In the association's Economic Outlook survey, 59% of companies reported seeing weak domestic demand as the biggest economic risk, while 60% identified rising personnel costs as a serious threat to production.

Approximately six out of 10 companies surveyed considered uncertainties in government economic policies as a risk. Furthermore, 48% stated that energy and raw material prices negatively impacted operational profitability.

While the Eurozone’s largest economy is seeing the green shoots of a recovery, there is still plenty of work to be done.

The Euro has been becalmed by the ECB's current handling of monetary policy. With both inflation and interest rates close to target, traders have only commercial flows to drive their position-taking.

Should the current situation continue for most of the year, traders’ bonuses will be meagre. However, this market is often unpredictable, with surprises just around the corner, driving volatility to new heights and increasing the risk for traders and investors.

Yesterday, the single currency chart was, yet again, a mirror image of the dollar index. It fell to a low of 1.1805, but it recovered to close at 1.1851

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