Street scene in Leeds, UK
Recruiters said redundancies, fewer vacancies and concerns about job security had contributed to a growing pool of applicants. Unsplash/Maz

The Confederation of British Industry (CBI) has warned that UK unemployment is on course to reach its highest level in more than a decade as rising business costs, weaker economic growth and global instability weigh on the economy.

In its latest economic outlook, the business group forecast that unemployment will rise to 5.5 per cent of the workforce, equivalent to around two million people out of work. If realised, that would mark the highest unemployment rate since mid-2015.

The forecast comes as the CBI downgraded its expectations for economic growth and warned that the conflict involving Iran is adding further pressure to households and businesses through higher energy costs and rising inflation.

Labour Market Showing Signs of Weakness

The CBI said UK economic growth is now expected to reach 1.1 per cent in 2026 and 0.9 per cent in 2027, both lower than forecasts published last December. Louise Hellem, the CBI's chief economist, said the UK economy entered 2026 with limited momentum and that recent international developments had further weakened the outlook for businesses and consumers.

Evidence of a softer labour market is already emerging. Research published by KPMG and the Recruitment and Employment Confederation (REC) found that permanent recruitment fell at its fastest pace in 10 months during May, while employers increasingly turned to temporary staff amid economic uncertainty.

Recruiters said redundancies, fewer vacancies and concerns about job security had contributed to a growing pool of applicants. REC chief executive Neil Carberry said many firms were delaying permanent hiring decisions because of higher costs, geopolitical uncertainty and changes to employment regulation.

Higher Energy Costs Add to Economic Pressures

The CBI said higher energy prices linked to the conflict involving Iran were contributing to inflationary pressures and reducing household spending power.

Consumer price inflation is forecast to peak at 3.7 per cent during the first quarter of next year, up from 2.8 per cent in April and broadly in line with recent projections from the Bank of England.

Business groups have also warned that rising costs are weighing on investment decisions. Last week, CBI chief executive Rain Newton-Smith urged the government not to treat firms as a 'cash tap', arguing that business taxation has reached record levels at a time when companies are already facing higher wage bills, energy costs and operating expenses.

Bank of England Faces Difficult Balancing Act

Economists expect the Bank of England to remain cautious on interest rates as policymakers attempt to balance slower growth against inflation that remains above the central bank's 2 per cent target.

The CBI forecasts that interest rates will remain at 3.75 per cent throughout 2026 and 2027. Recent comments from Bank of England policymaker Alan Taylor also suggest there is little appetite for rapid rate cuts unless economic conditions weaken significantly.

The CBI's projections broadly align with recent outlooks from the International Monetary Fund and the Organisation for Economic Co-operation and Development, both of which have warned that UK growth is likely to remain subdued over the coming years.

Although the labour market remains relatively resilient by historical standards, economists will be watching closely for signs that slower hiring and rising business costs begin to translate into higher unemployment during the second half of the year.

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