Britain faces a painful bout of stagflation and even recession as business is battered by soaring costs stemming from the Iran war on top of Labour’s tax hikes.
In a bleak report, S&P Global said its index of activity among UK services firms crashed to an 11-month low of 50.5 last month.
That left it just above the all-important 50 mark that separates growth from decline with experts warning the outlook is ‘darkening’.
Businesses in the services sector were hit by the biggest month-on-month jump in costs since 2021, as soaring oil and gas prices drove up energy and transportation bills, the report noted.
It came after S&P last week found manufacturers have seen their production costs rise at the fastest pace since the aftermath of Black Wednesday in 1992.
Chancellor Rachel Reeves has warned that Britain faces ‘significant’ economic challenges as a result of the conflict in the Middle East.
But analysts said the UK was already floundering before the war erupted – with recent official figures showing the economy was no bigger in January than it was in June last year.
Clive Black, an analyst at City broker Shore Capital, said: ‘An economically naive, ignorant and at times stupid UK Government will soon be blaming international affairs for a potential recession that exposes its poor policymaking.’
Tory business spokesman Andrew Griffith added: ‘Even before the Iran war, business confidence was weak.
‘The Chancellor must not hide behind global events when her own actions – including new costs and red tape on jobs kicking in today – mean the UK is worse affected than others.’
The conflict in the Middle East comes as companies and households reel from £75billion of tax hikes since Labour came to power.
Businesses have also been hit by inflation-busting increases in the minimum wage and Labour’s shake-up of workers’ rights.
The Organisation for Economic Cooperation and Development (OECD) last month warned Britain is set to be harder hit than any major advanced economy by the war.
The group slashed its UK growth forecast for this year by 0.5 percentage points to just 0.7 per cent and raised its inflation projection by 1.5 percentage points to 4 per cent.
In both cases it is the biggest hit for any member of the G7 group of advanced nations, which also includes the US, Canada, Japan, Germany, France and Italy.
Adding to the gloom today, S&P said its ‘composite’ index of activity in the UK, which includes manufacturing as well as the service sector, slumped to a six-month low of 50.3 last month.
The report said this ‘signalled only a marginal overall increase in private sector output’ amid ‘a loss of growth momentum in the service economy and a renewed downturn in manufacturing production’.
Matt Swannell, chief economic adviser to the EY Item Club, said: ‘The outlook for growth across the rest of this year is darkening.’
With prices also rising sharply alongside slowing growth, S&P economics director Tim Moore said ‘stagflation risks appear to have increased’.
Thomas Pugh, chief economist at consulting firm RSM UK, said: ‘The inevitable conclusion 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.
‘The inevitable impact of soaring energy prices will be slower growth. 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.
‘Obviously, everything depends on how energy prices move going forward but we now expect growth of around 0.5 per cent this year with a decent chance of a recession.’
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