The latest report from data provider S&P Global reveals that the UK economy has stagnated due to escalating costs caused by the ongoing conflict in the Middle East. Businesses experienced a decline in output for the second consecutive month, with the service sector being hit the hardest. This sector, which encompasses various industries such as banking and dining, represents a significant portion of the economy.
The survey highlights that companies are facing challenges from increased costs and reduced customer confidence, mainly attributed to the Middle East war and domestic political uncertainty. Despite a tentative peace agreement between US President Donald Trump and Iran, the economic repercussions of the energy crisis and the blockade of the Strait of Hormuz are expected to have a prolonged impact.
According to the report, businesses witnessed a sharp decline in new workloads, leading to job cuts. S&P Global projects a further 0.1% contraction in the economy this month, indicating no growth over the past three months.
The current economic situation underscores the difficulties that will confront the successor to Sir Keir Starmer as Prime Minister, with Andy Burnham emerging as the frontrunner. Selecting the Chancellor will be crucial, with Rachel Reeves likely to be replaced.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, emphasized the persistent price pressures stemming from the energy shock and supply constraints due to the Middle East conflict. While some of these pressures have started to ease, the subdued growth and labor market conditions suggest challenges in containing inflation.
Thomas Pugh, chief economist at RSM UK, expressed doubts about a significant growth recovery throughout the year. Even in the event of a smooth leadership transition to Burnham, fiscal policy direction remains uncertain, leading to speculations.
The forecast suggests that the Bank of England will maintain interest rates next month and for the remainder of the year, resuming rate cuts in 2027. Professor Joe Nellis, economic adviser at MHA, emphasized the importance of a thriving services sector in driving broader economic recovery. A sustainable boost in confidence, along with alleviation of inflationary and geopolitical pressures, could pave the way for a more stable business environment.
The current outlook remains challenging, requiring clear and pro-business policies from the incoming Prime Minister to foster stability and support economic growth.
