The UK service sector, which accounts for the vast majority of the economy, barely grew in March as the fallout from the war in the Middle East slammed business and consumer confidence, new orders collapsed, and fuel costs spiked.
The S&P Global UK Services PMI Business Activity Index dropped to a final reading of 50.5 in March from 53.9 in February. That’s the weakest expansion in 11 months and well below the flash estimate of 51.2 released earlier in the month. Any reading above 50 signals growth; anything closer to 50 is barely breathing.
The slowdown was driven by the first outright fall in new business since November 2025. The decline was the sharpest in eight months, with companies citing delayed investment decisions, weaker domestic spending, and a sharp drop in export orders, the fastest export slump since April 2025.
“UK service providers 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,” said Tim Moore, Economics Director at S&P Global Market Intelligence.
“Cutbacks to business and consumer spending meant that the rate of business activity expansion was the weakest seen since April 2025.”
At the same time, costs are rising fast. Input price inflation accelerated sharply to its highest level since April 2025, driven overwhelmingly by surging fuel and transportation bills, higher raw material prices, and suppliers passing on energy costs. Around 40% of firms reported higher input costs in March; only 2% saw a decline.
Service providers responded by hiking their own output prices at the fastest rate in 11 months.
The start of stagflation
The combination of slowing growth and rising costs has economists once again whispering the word stagflation, the toxic mix of stagnant activity and high inflation that central banks dread.
The broader picture looks even weaker. The S&P Global UK Composite PMI, which covers both services and manufacturing, fell to 50.3 in March from 53.7 in February – its slowest pace of expansion in six months. Manufacturing slipped back into contraction, while services lost momentum.
Business optimism also cratered. Expectations for the year ahead hit their lowest level in nine months, down sharply from a 15-month high in January. Firms pointed to uncertainty over how long the Middle East conflict will drag on, what it will do to inflation, supply chains, and borrowing costs.
Staffing levels continued to edge lower in March, though the pace of job cuts was the slowest since October 2025. Backlogs of work were broadly stable, as companies said they still had enough capacity despite shipping delays and worsening supply-chain performance.
With the Bank of England watching closely for signs that price pressures could become embedded, the combination of the weakest service-sector growth in nearly a year, the fastest input-cost surge in 11 months, and the sharpest drop in new orders in eight months paints a picture of an economy that is losing momentum just as inflation risks are re-accelerating.
“Stagflation risks appear to have increased, with the final Services PMI data signalling slower growth and higher cost pressures than the earlier ‘flash’ estimates… Rising global economic uncertainty due to the war in the Middle East contributed to a further decline in business confidence across the UK service economy,” Moore said.
Leave a Reply