More than 150,000 workers in the UK face losing their jobs next year, leading forecasters have warned, with unemployment expected to climb to 5.1% by the middle of 2027. The EY ITEM Club says companies across the country are freezing their hiring plans as they battle a difficult economy, and the jobs market is set to weaken further before it recovers.

The forecast puts the official unemployment rate on course to peak at 5.1% in mid-2027, which would mean around 150,000 more people out of work. The rate recently fell from 4.9% to 4.7% in the three months to August, according to the Office for National Statistics, but the ITEM Club warns that the fall is potentially misleading and likely overstates any real improvement in the jobs market.

A two-speed economy

The forecasters describe a two-speed economy. Output in the IT and professional services sectors is booming thanks to heavy investment in artificial intelligence, but that rapid expansion has not yet translated into a meaningful increase in hiring in those industries. At the same time, household finances are being squeezed by high energy bills, and businesses that rely on consumer spending are coming under growing pressure.

Hotels and hospitality venues are already feeling the strain, the report says. Those firms are trying to adjust to large increases in the National Living Wage and recent rises in employers’ National Insurance contributions, at a time when customers are cutting back on discretionary spending.

Pay growth set to slow

The weak hiring landscape will also affect people who keep their jobs. Economists expect private-sector pay growth to slow from 3.5% this year to slightly below 3% next year. With fewer vacancies on offer, workers will find it harder to demand chunky pay rises from their current employers, and harder to switch to a new company in search of higher earnings.

The gloomy jobs forecast comes as households brace for inflation to peak above 4% early next year. That rise in everyday living costs is being driven by rising wholesale gas prices, which will feed through to household energy bills in January.

Recovery not expected until 2028

The report does offer some hope. Experts predict the unemployment rate will eventually recover and fall back to 4.7% by the end of 2028, as the current energy price shock fades and inflation returns to more normal levels.

A spokesman for the Department for Work and Pensions said unemployment had fallen in recent months and there were 356,000 more people in work than at the same time last year. The picture is mixed: a separate survey of recruiters by KPMG and the Recruitment and Employment Confederation, published on 9 November, found permanent placements fell in October for the first time in four months.

The ITEM Club figures are forecasts, not a count of confirmed losses. The group is the only non-governmental forecaster to use HM Treasury’s model of the UK economy, and its projections are closely watched by policymakers. For jobseekers, the message is that competition for each vacancy is rising, and the hiring freeze is likely to last well into next year before conditions begin to ease.