The unpleasant echoes of 2022 are getting louder. Britain’s private sector grew at its weakest pace in six months in March, with the final composite purchasing managers’ index slipping to just 50.3, barely a touch above the line that separates growth from contraction and well below the 51 reading analysts had forecast.
For the thousands of small and medium-sized businesses that form the backbone of the UK economy, the message from the latest S&P Global data is clear: costs are rising sharply while customer demand is falling. In short, it’s the textbook definition of stagflation, and it’s back.
The main culprit is the war in the Middle East. Five weeks of American and Israeli strikes against Iran have sent oil and gas prices soaring, effectively shutting down the Strait of Hormuz, through which about a fifth of the world’s oil previously flowed, cutting off a vital supply artery. The knock-on effect for UK businesses was immediate and painful: material costs across the private sector rose at their fastest pace since February 2023.
Manufacturing companies were hit hardest by the problems, posting the biggest monthly rise in cost inflation since Black Wednesday in 1992. The manufacturing purchasing managers’ index fell to 51 from 51.7 in February, still in expansion territory but just barely, and margins are under severe pressure.
Yet it is the services sector, which accounts for around 80 per cent of the UK’s GDP, that is likely to be of most concern to entrepreneurs. Services activity slumped to an 11-month low of 50.5, a dramatic decline from 53.9 the previous month and a significant downgrade from the previous flash estimate. New business among services firms fell for the first time since November 2025, a worrying sign for all SMEs that rely on a healthy domestic order backlog.
Tim Moore, economic director at S&P Global Market Intelligence, pointed out that cuts in both business and consumer spending were the driving force behind the downturn, with increasing uncertainty over the Gulf conflict further weakening confidence. Business optimism across the private sector fell to its lowest level since June last year.
Thomas Pugh, chief economist at RSM UK, was more blunt in his assessment, warning that another bout of stagflation now appears inevitable and that continued conflict could plunge Britain into outright recession.
The comparison with the fallout from Russia’s invasion of Ukraine in 2022, when rising gas prices drove up inflation while growth stagnated, is hard to ignore. The Organization for Economic Co-operation and Development has already pointed out that the current crisis will cause the UK to suffer the worst fall in growth of any G20 country, along with the sharpest rise in inflation in the G7. GDP grew by only 0.1 percent in the final quarter of last year, barely providing a buffer.
For companies already struggling with thin margins and cautious consumers, the interest rate outlook offers little comfort. Markets now expect the Bank of England to raise interest rates twice this year from their current level of 3.75 percent, with analysts at Pantheon Macroeconomics forecasting a quarter-point rise in June, before two rate cuts in 2027. British government bond yields have risen sharply since the conflict began, limiting the Chancellor’s scope for fiscal support.
There was a small glimmer of comfort in the data: the pace of job cuts at service companies has slowed to its lowest level since October 2025. But with inflation forecasts suggesting prices could exceed 5 percent this year and no sign of a quick resolution to the conflict, the outlook for British businesses remains highly uncertain.
The picture on the other side of the English Channel is hardly more encouraging. The euro zone’s overall PMI fell to a nine-month low of 50.7, weighed down by weakness in Germany and decline in France. Chris Williamson, chief economist at S&P Global, warned of clear risks that the European economy could contract in the second quarter without hostilities ending quickly.
