Labour turmoil and Iran war brings ‘reversal of fortunes’ for UK economy

A combination of feverish political speculation and knock on effects from the war in Iran has culminated in a “reversal of fortunes” for the UK economy, as new data suggests activity across the private sector declined in May.

S&P Global’s monthly survey of hundreds of firms has shown that business across services companies declined in May, ending a 13-month run of growth. 

The composite purchasing managers’ index (PMI), the score tracking activity across the UK economy, dropped below the 50-figure threshold for neutrality in activity. 

The drop was described as a “setback” for the UK economy as services firms were hit by reduced consumer spending across travel, tourism and leisure. 

Firms attributed the drop in activity to political uncertainty and concerns about the effects of the Iran war, which has disrupted global trade and raised fears of supply shortages. 

Tim Moore, economics director for S&P Global, said the decline across the services sector “signalled a reversal of fortunes in May” as the impact of the Iran war is now set to be felt across the UK economy. 

“Many service sector companies noted that the Middle East conflict had an adverse impact on sales pipelines and general business prospects,” Moore said.

“Those in the hospitality and transportation sectors typically commented on squeezed discretionary spending and pressure from sharply rising input costs, while professional services firms reported a setback from rising risk aversion among clients.”

UK economy set for ‘stagflationary’ outlook

A rise in cost burdens on businesses eased slightly from April’s three-and-a-half-year high although the majority of respondents to the survey reported higher input prices. 

The rate of output pricing was lower than in April but firms said they were prepared to pass through the costs of higher fuel prices and payroll costs onto buyers. 

The survey also showed export sales easing in May and employers taking a more “cautious” approach on taking on more workers. 

The pace of job shedding was the fastest it has been since February, according to researchers. 

WPI Strategy chief economist Martin Beck said the data suggested “the outlook has become more stagflationary than it appeared only a few months ago”. 

He added: “The key question now is whether the recovery seen earlier this year can withstand a period of elevated global uncertainty. May PMIs suggest it has weakened, but not yet been derailed.”