UK services industry hit by Iran war as ‘stagflation’ risks increase

Activity in the UK’s services sector slowed last month as business and consumer spending were hit by war in the Middle East while cost inflation accelerated, increasing the risk of “stagflation”, according to a new survey.

The S&P Global UK services PMI survey, which is watched closely by economists, showed a reading of 50.5 in March, down from 53.9 in February.

This marked the lowest score for 11 months, but remained above the 50.0 threshold which indicates that activity is growing.

Businesses reported that concerns about the impact of the US-Israel’s war with Iran were putting a dampener on business and consumer spending.

The uncertain conditions were weighing on people’s confidence to spend and leading to delayed investment decisions, the survey found.

Export sales were also impacted last month with new work from abroad falling at the fast rate since April last year.

Meanwhile, the conflict has been having a direct impact on some businesses’ cost bases due to disruption to energy infrastructure and shipping routes in the Middle East, therefore pushing up fuel costs in the UK.

This has made transportation more costly and also pushed up prices for raw materials, according to the firms surveyed.

Tim Moore, economics director for S&P Global Market Intelligence, said that the services industry experienced a “marked slowdown in output growth in March as the war in the Middle East encouraged greater risk aversion among clients and postponed investment decisions”.

He said that “stagflation risks appear to have increased”, referring to rising inflation at the same time as slower economic growth.

“Overall input cost inflation has accelerated sharply since February and was the strongest for 11 months, which was overwhelmingly linked to rising fuel and transportation bills,” Mr Moore said.

“Many firms also noted that suppliers had sought to pass on higher prices paid for energy, raw materials and shipping.”

Thomas Pugh, chief economist at RSM UK, said: “The inevitable conclusion from this morning’s final PMI numbers for March is that the UK is in for another bout of stagflation, even if the conflict ends soon.

“If it drags on longer, a recession looks likely.

“We now expect the economy to stagnate for the rest of this year as higher energy prices and tighter financial conditions cause disposable income to shrink.

“Admittedly, the household saving rate is high entering the crisis, which would allow households to cushion the blow to disposable incomes by saving less, and government support may also reduce the impact on GDP (gross domestic product).”