Warning of unemployment surge as business costs force companies to close

UK unemployment levels hit the highest levels since Covid at the end of last year – but it could get even worse in 2026, experts have warned.

In the three months to October, Office for National Statistics (ONS) data showed unemployment hit 5.1 per cent – up from 4.3 per cent a year earlier – highlighting the rise of joblessness across the year.

That rate could now continue to surge in 2026 as a host of businesses coming under relentless cost pressures are forced to close.

Years of higher interest rates, rising employment costs, high energy bills and inflation pushing raw materials and service costs up have all contributed to making conditions extremely tough for companies.

That combination might “kill off” so-called zombie companies in the coming months, says one expert. Zombie companies is the term given to businesses which have struggled along and are unable to grow or adapt, but have not yet completely shut down as they earn just enough to keep surviving.

While businesses closing down is not generally seen as a positive, the closure of some firms leads to other newer, more innovative ones taking their place – which can in time lead to a productivity upturn and improve economic conditions in the long run. But, in the meantime, jobs will be lost from those shutting down.

Ruth Curtice, chief executive of the Resolution Foundation, said: “There are early and encouraging signs of a mild zombie apocalypse, where higher interest rates and minimum wages have combined to kill off struggling firms and leave the door open for new, more productive ones to replace them.

“But while this is good news for our medium-term economic prospects, the short-term impact could be job displacement and higher unemployment. Policymakers will need to redouble efforts to address this problem.”

Two-thirds (67 per cent) of economists surveyed believe unemployment will be between 5 and 5.5 per cent come the end of 2026, a Times report shows.

That would be the highest since 2015 (5.6 per cent) if it reached the top end of that range when the unemployment rate was in the middle of descending from a 2011 peak of 8.4 per cent.

open image in gallery

Many firms paused or cancelled plans to recruit new talent towards the back end of 2025 amid uncertainty of Rachel Reeves’ Budget and the cost implications of hiring.

That came after rises earlier in the year to National Insurance contributions, as well as the minimum wage.

As an aside to overall job levels, there are several factors pointing towards young people bearing the brunt of the damage when it comes to finding work.

ONS data showed unemployed 18 to 24-year-olds numbers increased by 85,000 across the three months to October, the largest such rise in three years.

The government’s pledge to create a single cost of employment for all adults, rather than the two-tier system currently in place where 18 to 20-year-olds are paid a lower minimum wage, has also seen suggestion from business leaders that companies will simply stop hiring inexperienced younger people as it will not be cheaper than employing someone with several years in the workforce behind them.