UK services firms post first drop in activity since April 2025 as Iran war price pressure persists
Overview of UK Services Sector Performance Amid Global Tensions
By Suban Abdulla and David Milliken
LONDON, June 3 (Reuters) - British services firms suffered a small fall in activity in May as the strains of the Iran war pushed up their costs sharply and hit optimism, a survey showed on Wednesday.
Key Survey Findings
The S&P Global Purchasing Managers' Index for Britain's services sector fell to 49.3 from April's 52.7, representing the first fall in output since April 2025, though the reading was stronger than the original flash estimate of 47.9. A reading below 50 signals contraction, while one above 50 signifies growth.
Earlier on Wednesday, the OECD nudged up its growth forecast for Britain this year to 0.9% from the 0.7% it predicted just after the Middle East conflict broke out, and the decline in activity signalled by the PMI was smaller than in the euro zone.
Inflation and Cost Pressures
Inflation pressures remain strong, however. The PMI's gauge of input cost inflation fell slightly in May but was still the second-highest since December 2022, in the aftermath of Russia's full-scale invasion of Ukraine. Businesses said rising energy, fuel and transport costs, as well as salaries, contributed to the surge.
Businesses Pass On Higher Costs
BUSINESSES PASS ON HIGHER COSTS
Companies passed on these costs to customers by raising prices on the second-broadest basis in three years, only just behind April's increase.
Business Sentiment and Monetary Policy
"Worries about a prolonged spike in inflationary pressures, combined with elevated geopolitical tensions and subdued demand, continued to weigh on business activity expectations in May," said Tim Moore, economics director at S&P Global Market Intelligence.
Despite the inflationary warning signal, the Bank of England is unlikely to raise interest rates this month - something that markets had judged a near-certainty after the Middle East conflict started - as Governor Andrew Bailey takes the view that the bank has time to wait to get a better sense of the impact.
Financial markets on Tuesday saw a 90% chance that the BoE will keep borrowing costs at 3.75% in its June 18 announcement.
Concerns Over Broader Inflation
However, in a speech at the University of Derby on Tuesday, BoE policymaker Megan Greene said price rises by services companies not hit hard by energy costs showed Britain might be facing a broader inflation problem.
"To my mind it was quite surprising that services firms are putting up their prices so much in the face of this shock," she said.
Outlook for Employment and Demand
S&P said business sentiment about the year ahead slipped to its weakest since last April when it tumbled after U.S. President Donald Trump announced an array of trade tariffs.
Hiring contracted for the 20th month in a row, the longest continuous period of job shedding since early 2010.
"The dilemma facing the Monetary Policy Committee is becoming clear. Businesses are reducing headcount while raising prices," said Matt Swannell, chief economic adviser to forecasters ITEM Club, who expect rates to be on hold all year.
Survey respondents reported weaker domestic and overseas demand in May.
Composite PMI and Final Remarks
The composite PMI, which includes last week's manufacturing data, was revised up to 49.7 from a preliminary reading of 48.5 and down from 52.6 in April.
(Reporting by Suban Abdulla and David Milliken; Editing by Hugh Lawson)