British companies are experiencing their most widespread decline in activity in more than a year as the economic effects of the Iran war and domestic political uncertainty weigh heavily on business confidence, according to a survey released on Thursday.
Data company S&P Global said its preliminary UK Composite Purchasing Managers’ Index (PMI) for May dropped sharply to 48.5 from 52.6 in April.
The reading fell below the 50-point threshold that separates growth from contraction for the first time since April 2025.
Services sector sees steepest decline since pandemic period
The survey showed the services sector recorded a particularly steep fall in activity.
The measure tracking services firms dropped to their lowest level since January 2021, when Britain was under COVID-19 restrictions.
Meanwhile, manufacturing companies reported a rise in orders.
However, the increase was largely driven by customers attempting to secure supplies ahead of potential further price increases and supply chain disruptions linked to the Iran conflict.
Businesses surveyed cited a combination of rising energy prices, shipping delays caused by tensions in the Middle East, and growing political uncertainty in Britain as key reasons behind the slowdown.
Companies also pointed to uncertainty surrounding British Prime Minister Keir Starmer and questions over potential leadership succession as factors damaging confidence levels.
‘Perfect storm’ facing UK economy, says S&P Global economist
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the UK economy was facing mounting pressure from multiple fronts.
“The UK economy is facing a perfect storm as rising political uncertainty adds to the growing impact from the war in the Middle East,” Williamson said.
He added that the latest PMI reading suggested Britain’s economy was on track to contract by 0.2% on a quarterly basis, reversing what had been an unexpectedly strong start to the year.
Inflation pressures remain elevated
The survey also highlighted continued inflationary pressure on businesses.
Companies reported another substantial increase in operating costs, only slightly below April’s rise, which had marked the largest jump in more than three years.
The increase in expenses was largely driven by higher energy prices linked to the Iran war, alongside rising wage costs.
Although the survey’s broader measure of selling prices rose at a slightly slower pace than in April, manufacturers increased their prices at the fastest rate since July 2022.
The report further showed companies continued to reduce hiring plans, extending the trend to a 20th consecutive month.
Expectations for future business activity also weakened, falling to their lowest level since April 2025.
Bank of England faces policy dilemma
Williamson said the combination of weakening economic activity and persistent inflation pressures placed the Bank of England in a difficult position.
According to financial market expectations, the Bank of England is anticipated to raise interest rates twice during the remainder of 2026.
The survey was released as US stocks rebounded on Wednesday following a three-day selloff, supported by gains in technology and chip-related stocks.
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