Latest data shows the UK economy may have flat-lined with firms feeling the financial fall-out from the Middle East conflict
The UK economy has flat-lined this month as firms face a “litany” of cost increases due to the Middle East war, a report found.
A survey by data provider S&P Global found businesses as a whole saw their output fall for the second month running.
The downturn was led by firms in the service sector – everything from banks to restaurants – that account for around 80% of the economy. The difficulties have been put down to sharply rising costs and lower customer confidence, mostly due to the war in the Middle East and political uncertainty here in the UK.
While US President Donald Trump has agreed a tentative peace deal with Iran, the economic fall-out from the war-caused energy shock and blockade of the Strait of Hormuz is expected to be felt for some time come.
Companies saw new workloads fall at the fastest rate in 14 months, leading to job losses, said the report. S&P estimates the economy will shrink by another 0.1% this month, meaning it will not have grown at all over the past three months.
The weak picture is a sobering reminder of the challenges facing whoever replaces Sir Keir Starmer as PM, with Andy Burnham the frontrunner. Choosing his Chancellor will be key, with Rachel Reeves expected to get the chop.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Price pressures remain elevated as companies point to the energy shock and supply squeeze from the war in the Middle East as exacerbating existing cost pressures from government policies. These higher costs, combined with subdued business growth expectations for the year ahead, have caused employment to continue to fall at a worryingly high rate.”
He added: “Some of the war-related price pressures have started to moderate, however, largely thanks to lower energy prices, and the subdued growth and labour market pictures suggest that demand and wage-bargaining power are sufficiently slack to prevent inflation becoming entrenched.”
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said: “We doubt growth will pick up much through the rest of the year. Even if a Burnham coronation is likely, avoiding a messy, protracted leadership contest, there will still be speculation about the direction of fiscal policy in the coming months.”
He reiterated its forecast that the Bank of England will keep interest rates on hold next month and throughout the rest of the year before resuming cuts in 2027.
Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, said: “A flourishing services sector will be at the heart of any recovery in the wider economy.
“A rebound in confidence in July will be important, but this must be sustainable rather than short-lived. If inflationary and geopolitical pressures can begin to ease over the summer, and if the incoming Prime Minister can set out a clear, pro-business policy direction, a more stable and supportive operating environment could emerge – but the outlook currently remains bleak.