The latest report from data provider S&P Global reveals that the UK economy has stagnated as businesses struggle with a series of cost increases linked to the recent conflict in the Middle East. Overall, companies experienced a decline in output for the second consecutive month.
The service sector, encompassing a wide range of businesses such as banks and restaurants and representing about 80% of the economy, was particularly hard-hit by soaring costs and diminished customer confidence. This challenging environment is primarily attributed to the ongoing Middle East war and domestic political uncertainties.
Despite a tentative peace agreement between US President Donald Trump and Iran, the economic repercussions of the energy shock and the blockade of the Strait of Hormuz are anticipated to have lasting effects. Companies reported a significant drop in new workloads, leading to job cuts. S&P Global predicts a further 0.1% contraction in the economy this month, marking zero growth over the past three months.
The grim economic outlook underscores the difficulties awaiting the successor to Sir Keir Starmer as Prime Minister, with Andy Burnham emerging as a frontrunner. The choice of Chancellor will be crucial, with Rachel Reeves likely to be replaced.
Chris Williamson, S&P Global Market Intelligence’s chief business economist, highlighted the persistent price pressures stemming from the energy shock and supply disruptions caused by the Middle East conflict. While some of these pressures have started to ease, subdued growth expectations and ongoing job losses remain concerning.
Thomas Pugh, chief economist at RSM UK, expressed doubts about significant growth in the near future, emphasizing the importance of clarity on fiscal policy. He projected that the Bank of England will maintain interest rates next month and possibly resume cuts in 2027.
Professor Joe Nellis, economic adviser at MHA, emphasized the pivotal role of a thriving services sector in driving broader economic recovery. He stressed the need for sustained confidence and easing inflationary pressures, urging the incoming Prime Minister to articulate a pro-business policy agenda for a more stable operating environment.
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