UK services sector contracts as Iran war drives costs higher

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UK services sector contracts

Highlights

The UK services PMI fell to 49.3 in May from 52.7 in April, indicating contraction for the first time since April 2025.
Input cost inflation remains the second-highest since December 2022, with over half of firms reporting increased energy, fuel, transport and salary expenses.
The Bank of England is now unlikely to raise interest rates this month despite persistent inflation pressures and previously elevated market expectations after the Middle East conflict began.

PMI survey signals renewed pressure

S&P Global data show the UK's services Purchasing Managers' Index falls to 49.3 in May from 52.7 in April, below the 50 threshold that separates growth from contraction. The reading is stronger than the earlier flash estimate of 47.9, but it still points to the first decline in output since April 2025.

Input cost inflation eases slightly from April, yet remains the second-highest since December 2022. Businesses cite rising energy, fuel, transport and salary costs, and more than half of surveyed firms report higher average cost burdens last month.

Companies also raise prices at the second-fastest pace in three years, only marginally slower than in April. Tim Moore, economics director at S&P Global Market Intelligence, says worries about a prolonged spike in inflationary pressures, elevated geopolitical tensions and subdued demand continue to weigh on business activity expectations in May.

Demand, sentiment and policy outlook

Business sentiment for the year ahead weakens to its lowest level since last April, when confidence fell after U.S. President Donald Trump announced a range of trade tariffs. Survey respondents report softer domestic and overseas demand in May, adding to pressure on the sector.

Employment in the services sector contracts for the 20th consecutive month, the longest continuous period of job shedding since early 2010. The composite PMI, which includes manufacturing data published last week, is revised up to 49.7 from a preliminary 48.5 but is still down from 52.6 in April.

Despite the survey's inflation warning, the Bank of England is unlikely to raise interest rates this month, even though markets had previously viewed such a move as near-certain after the Middle East conflict begins.

Our earlier article covered the latest spike in oil prices after Iran launched missiles and drones toward Kuwait and Bahrain, followed by U.S. strikes on Iran’s Qeshm Island near the Strait of Hormuz. With Brent nearing $100, the report highlighted how any disruption risk around this key shipping chokepoint can quickly raise transport costs, tighten supply expectations, and revive inflation pressure.

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