The UK economy is set to suffer from stagflation over the coming months as growth across the services sector ground to a halt in March, researchers have indicated.
The war in the Middle East has brought output growth to its slowest level since last April while input price inflation hit its highest level since the same month last year, the two economic circumstances that define a stagnant economy suffering from soaring price rises.
Data collected by S&P Global suggests that trade disruption near Iran has set back the UK economy after months of gradual improvements.
It deals a blow to the Labour government’s hopes of boosting the private sector and gives Bank of England policymakers a headache on an upcoming interest rates decision.
The composite purchasing managers’ index (PMI) reading was just above the benchmark for neutrality in activity. The score was 50.3, lower than an earlier estimate provided in March.
It represents the slowest rate of expansion in business activity in six months.
Overall input costs for UK private sector firms rose at the fastest pace since February 2023, S&P Global analysts added.
‘Stagflation risks increase’
The combination of rising inflation, higher borrowing costs and “fragile” conditions relating to public finances, the jobs market and productivity could deepen the economic crisis in the middle of this year.
“Stagflation risks appear to have increased, with the final services PMI data signalling slower growth and higher cost pressures than the earlier ‘flash’ estimates based on data compiled up to 20th March,” Tim Moore, economics director at S&P Global, said.
“Many firms also noted that suppliers had sought to pass on higher prices paid for energy, raw materials and shipping.”
Thomas Pugh, an economist at the accountancy RSM, said it was “inevitable” that the UK economy was heading for another bout of stagflation. He added that a recession has become more probable.
Business chiefs responding to the survey also said that turmoil in the Middle East, which has kept oil prices trading firmly above the $100 per barrel mark for weeks, led to delayed investment decisions and a slump in confidence among clients.
‘Worst oil shock in history’
Energy analysts have warned that the crisis is worse than calculated by markets and policymakers.
Fatih Birol, the head of the International Energy Agency, told a French newspaper that the oil shock was worse than crises in 1973, 1979 and 2002 combined.
“The world has never experienced a disruption to energy supply of such magnitude,” Birol told Le Figaro.
He added that developing countries were more exposed to higher fuel costs and rising food prices though European countries were also likely to suffer.
UK economy depends on Trump’s actions
The prospect of stagflation will unnerve businesses across the UK economy, such as high street giants, essential retailers, City consultants and warehouse managers.
Export sales were also subdued while business confidence was at its lowest point since last June.
Business chiefs and policymakers’ eyes will now be on President Trump’s next move as another negotiations deadline approaches at the end of Tuesday.
Trump has dangled the prospect of a nuclear attack on Iran should it not agree to a ceasefire and opening the Strait of Hormuz, which has around a fifth of global crude oil supplies pass through it, and is critical for trade of other key materials such as helium.
The Labour government is considering rolling out an energy support package for poorer households, though home energy bills will not change until at least July.
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