Britain's services sector experienced a significant slowdown in March, and a key survey indicates that geopolitical tensions in the Middle East and accelerating cost inflation are increasing the risk of “stagflation.”
The closely watched S&P Global UK services PMI survey recorded a reading of 50.5 in March, a notable drop from 53.9 in February.
While this marks the lowest score recorded in 11 months, the figure remains just above the 50.0 threshold, indicating continued growth within the sector.
Companies attributed the slowdown to concerns over the US-Israel conflict with Iran, which they said is stifling spending by both businesses and consumers.
According to the survey results, the prevailing uncertain conditions are also eroding public confidence and causing delays in investment decisions.
Additionally, export sales took a hit in March as new international jobs declined at their fastest pace since April 2025, adding to the challenging economic backdrop.
Meanwhile, the conflict has had a direct impact on the cost bases of some companies due to the disruption of energy infrastructure and shipping routes in the Middle East, which has driven up fuel costs in the UK.
This has made transportation more expensive and has also raised the prices of raw materials, according to the companies surveyed.
Tim Moore, chief economic officer at S&P Global Market Intelligence, said the services industry saw a “marked slowdown in output growth in March as the war in the Middle East fostered greater risk aversion among customers and postponed investment decisions.”
He said “risks of stagflation appear to have increased,” referring to rising inflation at the same time as slower economic growth.
“Overall input cost inflation has accelerated markedly since February and was the strongest in 11 months, which was overwhelmingly related to rising fuel and transportation bills,” Moore said.
“Many companies also noted that suppliers had tried to pass on higher prices paid for energy, raw materials and transportation.”
Thomas Pugh, chief economist at RSM UK, said: “The inevitable conclusion from this morning's final March PMI figures is that the UK faces another bout of stagflation, even if the conflict ends soon.
“If it continues any longer, a recession seems likely.
“We now expect the economy to stagnate for the rest of this year as higher energy prices and tighter financial conditions cause disposable income to shrink.
“It is true that the household savings rate is high at the beginning of the crisis, which would allow households to cushion the blow to disposable income by saving less, and government support can also reduce the impact on GDP (gross domestic product).”
