UK stagflation fears grow as private sector PMI slumps to six-month low

The uncomfortable echoes of 2022 are growing louder. Britain’s private sector expanded at its weakest pace in six months during March, with the final composite purchasing managers’ index slipping to just 50.3, barely a whisker above the line that separates growth from contraction and well below the 51 reading analysts had pencilled in.

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 stark: costs are rising sharply while customer demand is falling away. It is, in short, the textbook definition of stagflation, and it is back.

The principal culprit is the war in the Middle East. Five weeks of US and Israeli strikes against Iran have sent oil and gas prices surging, with the effective closure of the Strait of Hormuz, through which roughly a fifth of the world’s oil previously flowed, choking off a vital supply artery. The knock-on effect for British firms has been immediate and painful: material costs across the private sector rose at their fastest rate since February 2023.

Manufacturing businesses bore the sharpest pain, recording their steepest month-on-month rise in cost inflation since Black Wednesday in 1992. The manufacturing PMI edged down to 51 from 51.7 in February, still in expansion territory, but only just, and with margins under severe strain.

Yet it is the services sector, responsible for roughly 80 per cent of British GDP, that should concern business owners most. Services activity slumped to an 11-month low of 50.5, a dramatic fall from 53.9 the previous month and a significant downgrade from the earlier flash estimate. New business among services firms fell for the first time since November 2025, a worrying sign for any SME dependent on a healthy domestic order book.

Tim Moore, economics director at S&P Global Market Intelligence, pointed to cutbacks in both business and consumer spending as the driving force behind the downturn, with rising uncertainty over the Gulf conflict further eroding confidence. Business optimism across the private sector fell to its lowest level since last June.

Thomas Pugh, chief economist at RSM UK, was blunter in his assessment, warning that another bout of stagflation now looks unavoidable, and that a prolonged conflict could tip Britain into outright recession.

The comparison with the aftermath of Russia’s invasion of Ukraine in 2022, when soaring gas prices pushed inflation higher while growth stalled, is difficult to ignore. The Organisation for Economic Co-operation and Development has already suggested that Britain stands to suffer the worst growth hit of any G20 nation from the current crisis, alongside the sharpest inflation rise in the G7. GDP managed just 0.1 per cent growth in the final quarter of last year, offering precious little cushion.

For businesses already grappling with thin margins and cautious consumers, the interest rate outlook offers scant comfort. Markets now expect the Bank of England to raise rates twice from their current level of 3.75 per cent this year, with analysts at Pantheon Macroeconomics forecasting a quarter-point rise in June before two cuts follow in 2027. UK government bond yields have climbed steeply since the conflict began, limiting the chancellor’s room for fiscal support.

There was one small crumb of comfort buried in the data: the pace of job cuts among services companies eased to its slowest since October 2025. But with inflation forecasts suggesting prices could breach 5 per cent this year and the conflict showing no sign of swift resolution, the outlook for British businesses remains deeply uncertain.

The picture across the Channel is scarcely more encouraging. The eurozone’s composite PMI fell to a nine-month low of 50.7, dragged down by weakness in Germany and contraction in France. Chris Williamson, chief business economist at S&P Global, warned of clear risks that the European economy could shrink in the second quarter without a rapid end to hostilities.

Jamie Young

Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.

When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.