The uneasy echoes of 2022 are growing louder. Britain’s private sector expanded at its weakest pace in six months in March, when the final PMI fell to 50.3, barely a whisker above the line separating growth from contraction and below the 51 reading analysts had penciled in.
For the thousands of small and medium-sized businesses that form the backbone of the UK economy, the message from the latest S&P Global data is clear: costs are rising sharply while customer demand is falling. In short, the textbook definition of stagflation, and it’s back.
The main cause is the war in the Middle East. Five weeks of US and Israeli strikes against Iran have sent oil and gas prices soaring, and the effective closure of the Strait of Hormuz, through which about a fifth of the world’s oil previously flowed, cut off a vital artery. The result for British companies was swift and painful: material costs in the entire private sector rose at the fastest rate since February 2023.
Manufacturing businesses have borne the brunt of the pain, recording the highest monthly cost increases since Black Wednesday in 1992. The manufacturing PMI fell to 51 from 51.7 in February, still in expansionary territory, but only modestly, and with limits under severe pressure.
But it is the services sector, which accounts for around 80 per cent of Britain’s GDP, that should worry business owners the most. Services activity fell to an 11-month low of 50.5, a sharp drop from 53.9 last month and a significant drop from the previous flash estimate. New business among services firms fell for the first time since November 2025, a worrying sign for any SME dependent on a healthy domestic order book.
Tim Moore, director of economics at S&P Global Market Intelligence, pointed to a slowdown in both business and consumer spending as the cause of the recession, with rising uncertainty over the Gulf conflict also eroding confidence. Business confidence across the private sector fell to its lowest level since last June.
Thomas Pugh, chief economist at RSM UK, did not comment on his assessment, warning that another crisis now looks inevitable, and that a prolonged conflict could plunge Britain into a full-blown recession.
The comparison with the consequences of Russia’s invasion of Ukraine in 2022, when rising fuel prices increase inflation while growth stagnates, is hard to ignore. The Organization for Economic Co-operation and Development has already suggested that Britain will face the worst growth of any G20 country since the crisis, and the strongest inflation in the G7. GDP was only able to grow by 0.1 percent in the last quarter of last year, providing precious little cushion.
For businesses already facing thin margins and wary consumers, the interest rate outlook offers little comfort. Markets now expect the Bank of England to raise rates twice from their current rate of 3.75 percent this year, with analysts at Pantheon Macroeconomics predicting a quarterly hike in June before two cuts in 2027. UK government bond yields have risen sharply since the start of the conflict, limiting the chancellor’s support base.
There was one small piece of comfort buried in the data: the pace of job cuts among service companies is being gradually reduced from October 2025. But with inflation forecasts suggesting rates could break 5 percent this year and the conflict showing no signs of an immediate resolution, the outlook for British businesses remains deeply uncertain.
The picture across the channel is less encouraging. The eurozone composite PMI fell to a nine-month low of 50.7, dragged down by weakness in Germany and contraction in France. Chris Williamson, chief economist at S&P Global, warned of obvious risks that the European economy could shrink in the second quarter without a quick end to the conflict.
