UK Services Sector Slows as Iran Conflict Raises Stagflation Fears
The UK's services sector has experienced a marked slowdown in March, with a key business survey indicating that geopolitical tensions in the Middle East and accelerating cost inflation are heightening the risk of stagflation. The closely watched S&P Global UK services PMI survey registered a reading of 50.5 in March, a notable dip from February's 53.9. While this marks the lowest score recorded in eleven months, the figure remains just above the 50.0 threshold, which indicates ongoing growth within the sector.
Geopolitical Tensions Impact Business and Consumer Spending
Businesses attributed the deceleration to concerns surrounding the US-Israel conflict with Iran, which they said is stifling both business and consumer spending. The prevailing uncertain conditions are also eroding public confidence and prompting delays in investment decisions, according to the survey findings. Furthermore, export sales suffered a blow in March, with new international work declining at its fastest pace since April 2025, adding to the challenging economic backdrop.
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.
Experts Warn of Increased Stagflation Risks
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 added 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 eleven months, which was overwhelmingly linked to rising fuel and transportation bills," Mr Moore stated. "Many firms also noted that suppliers had sought to pass on higher prices paid for energy, raw materials and shipping."
Economic Outlook Remains Uncertain
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."
He continued: "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."
The survey findings highlight the delicate balance facing the UK economy, with the services sector's slowdown underscoring broader vulnerabilities. As geopolitical tensions persist, businesses and policymakers alike are grappling with the dual challenges of managing inflation while supporting growth, making the path forward increasingly complex.
