UK Services Firms Report Surge in Costs, Fading Optimism as Iran War Takes Toll

UK Services Firms Face Rising Costs and Lower Optimism from Iran War Effects

Impact of Iran War on UK Services Sector: Costs, Demand, and Outlook

By Suban Abdulla

Rising Costs and Inflationary Pressures

LONDON, April 7 (Reuters) - Businesses in Britain's services sector reported the biggest month-on-month jump in costs in March since 2021, driven by higher energy and transportation prices, according to a survey that underscored the inflationary risks from the Iran war.

Service Sector PMI and Input Prices

The S&P Global Purchasing Managers' Index for the services industry, published on Tuesday, dropped to 50.5 from February's 53.9 - further than the fall to 51.2 initially reported for March and its lowest reading in 11 months.

The composite PMI, which includes last week's weaker manufacturing data, was revised down to 50.3 from the preliminary reading of 51.0.

S&P Global's gauge of input prices paid by British services firms was the highest in nearly a year and the jump to 68.4 in March from 63.1 in February was ​the biggest from one month to the next since a February-to-March leap in 2021.

Manufacturing Sector Comparison

Manufacturers last week reported the biggest month-on-month jump in input costs since October 1992.  

Around 40% of the respondents in Tuesday's services survey reported an increase in their input costs during March.

Tim Moore, economics director at S&P Global Market Intelligence, said many companies reported suppliers passing on higher prices paid for energy, raw materials and shipping.

The survey's gauge of prices charged by service businesses jumped to 58.5 in March from 55.2 in February.

Bank of England Perspective and Pricing Power

Bank of England Governor Andrew Bailey told Reuters last week that firms had limited pricing power to pass on cost increases although some pass-through of higher energy costs was likely.  

Demand Weakness and Business Sentiment

Companies also reported weaker demand. 

Effects of Middle East Conflict on Client Activity

"UK service providers experienced a marked slowdown in output growth in March as the war in the Middle East encouraged greater risk aversion among clients and postponed investment decisions," Moore said. 

Export Business and New Orders

The services PMI's measure of new export business dropped to 46.3 from 50.3, the fastest rate of decline in 11 months and below the 50 level that divides growth from contraction for the first time since last November when uncertainty in the run-up to finance minister Rachel Reeves' budget hit businesses.

Companies also reported the biggest drop in new orders since July, although they cut staffing at the slowest pace in four months.

Outlook and Optimism

Optimism about the outlook was at its weakest since June last year, with services firms citing concerns about the duration of the Iran war and its impact on inflation, supply chains and borrowing costs.

(Reporting by Suban Abdulla; Editing by Hugh Lawson)