Barclays has raised its UK unemployment forecast by 0.2 percentage points for both 2026 and 2027, now expecting the rate to peak at 5.4% in Q2 2026. The revision follows December data showing unemployment at 5.2% on a three-month moving average, with December alone printing at 5.4%.

Payroll data revealed PAYE employees contracted by 11,000 in January, while wage growth slowed to 3.4% year-on-year in December. Retail sales volumes grew by 1.8% month-on-month in January, significantly above forecasts, suggesting some economic resilience despite labour market weakness. The government recorded a record £30.4 billion public sector net borrowing surplus in January.

Despite January inflation coming in slightly higher than expected at 3.0% headline and 3.1% core, Barclays maintained its 2026 inflation forecast at 2.2%. The bank expects the Office for Budget Responsibility's March update to show little change to fiscal forecasts. Barclays continues to project GDP growth of 0.3% quarter-on-quarter in Q1 2026, indicating the economy may be stabilizing even as unemployment pressures mount.