Gulf conflict risks reversing UK labour market stability

The UK labour market has shown signs of resilience in recent months, with unemployment holding steady at 5.2% for a second consecutive period. However, escalating tensions in the Middle East are casting a long shadow over this stability.

Robert Salter, Director, said:

General employment and youth employment will be hit hard by the sharp rise in petrol and diesel costs caused by the Gulf conflict. Although Office of National Statistics (ONS) report issued today (19th March) shows that UK unemployment has stabilised at 5.2%, it does not take into account the expanding war in the Middle East.

Why fuel costs matter beyond transport

While energy-intensive sectors such as logistics and petrochemicals are the most obvious casualties of rising fuel prices, the impact is far broader. Higher transport and distribution costs ripple through supply chains, increasing the cost of goods and services across the economy.

For many businesses, particularly SMEs operating on tight margins, this creates a difficult trade-off: absorb higher costs or pass them on to customers. Either option can constrain growth and hiring.

Businesses will be hurt financially, even outside of the transport and petrochemicals sectors, ultimately affecting their hiring plans. High fuel costs may reduce the distance people are able to travel for work or to seek work, and therefore their employment options.

This highlights a dual pressure point: employers may hire less, while workers face reduced mobility, limiting access to job opportunities.

Youth employment under increasing strain

Youth unemployment remains at about 16%. While the Government has announced some initiatives to help young people into work, they may be too little, too late. The Government’s own policies such as increasing employer’s National Insurance Contributions (NICs) and the National Minimum Wage have pushed up the cost of employing workers. Rising inflation due to the Gulf conflict will increase running costs for businesses, reducing the number of entry level roles available.

For employers, rising wage floors and payroll taxes – while socially important – raise the threshold for creating new roles. In uncertain economic conditions, this often leads to a reduction in entry-level hiring, disproportionately affecting younger jobseekers.

Wage growth: a fragile bright spot

Wage inflation is at 3.8% overall and is growing quicker than the rate of overall inflation. But this light at the end of the tunnel could be snuffed out if the Government does not address the economic impact of the gulf conflict.

If fuel-driven inflation accelerates, it could erode real wages once again, weakening consumer spending and further dampening business confidence.

Policy pressure: fuel duty in focus

Government policy will play a critical role in shaping how these pressures unfold. One key area under scrutiny is fuel duty.

In her last budget, The Chancellor, Rachel Reeves announced the gradual removal of the 5p fuel duty ‘cut’ which has been in place since 2022, with higher fuel duty rates starting to be imposed on a gradual basis from September 2026.

In a more stable environment, such a move may have been manageable. But against the backdrop of geopolitical instability and rising oil prices, it risks amplifying cost pressures.

Robert concludes:

Given the issues in the Middle East, and the fact that key oil & gas-related infrastructure appears to be an increasing focus of military attacks, Rachel Reeves should announce a change of direction on the fuel duty increase and perhaps even considering reducing the core fuel duty rates more pro-actively. This would provide some certainty to businesses and taxpayers that they will be shielded from some of the immediate economic impact of the conflict, allowing them to afford to hire new workers. And for those looking for work to afford the transport costs associated with job seeking.

What this means for businesses and individuals

For businesses, the message is clear: external geopolitical risks are once again feeding directly into domestic economic conditions. Cost volatility, particularly in energy remains a key threat to planning and investment.

For individuals, especially younger workers, the risks are equally tangible. Reduced hiring, higher travel costs and fewer entry-level opportunities could make an already challenging labour market even more difficult to navigate.

What you should consider or do next

Review cost exposure: Assess how sensitive your business is to fuel and energy price increases, both directly and across your supply chain.

Stress-test hiring plans: Consider whether rising costs could impact recruitment timelines or workforce expansion.

Support workforce flexibility: Explore remote or hybrid working options to mitigate commuting cost pressures for employees.

Monitor policy developments: Keep a close eye on fuel duty decisions and wider fiscal responses, as these could materially affect operating costs.

Plan for inflation scenarios: Build contingencies for sustained or rising inflation, particularly in wage expectations and supplier pricing.

For jobseekers: Factor transport costs into job decisions and consider roles with flexible or remote options where possible.

In a volatile global environment, the interplay between geopolitics, policy and the labour market is becoming increasingly pronounced. Businesses that anticipate these linkages and act early will be better placed to navigate the uncertainty ahead.

Would you like to know more?

If you would like to discuss this topic in more detail, please contact your usual Blick Rothenberg contact or Robert Salter using the form below.