UK growth slows and inflation surges amid Iran war, PMI Shows

[LONDON] British businesses barely grew this month as the war in Iran sapped demand and triggered the biggest increase in costs in more than three years, according to a closely watched survey.

S&P Global’s purchasing managers’ index dropped to a six-month low of 51 in March, down from 53.7 previously and much worse than the 52.8 expected by economists. 

While the reading remained above the 50 threshold separating growth and contraction, the survey showed the impact of war in the Middle East rippling through supply chains and hitting customer demand. 

Overall input costs rose at the fastest pace since February 2023, driven by fuel, transportation and energy-intensive raw materials. However, factories were hit by the sharpest pickup in cost inflation since Black Wednesday in 1992 when sterling plunged following its ejection from the European Exchange Rate Mechanism.

Economists have rushed to cut their growth projections for the UK economy in recent days, anticipating a resurgence in inflation that prompts households to tighten their belts and the Bank of England to raise interest rates. At one point on Monday, investors were betting on as many as four rate hikes from the UK central bank.

“Output growth across manufacturing and services has slowed to a crawl as companies blamed lost business directly on the events in the Middle East,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. He said the impact was coming through risk aversion, surging price pressures, higher interest rates and supply chain disruptions.

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S&P said that the conflict was also already causing a decline in new work due to lower business and consumer confidence. Demand from overseas also dwindled, resulting in the sharpest drop in new work from abroad for services firms in almost a year.

Firms’ expectations for the year ahead weakened to the lowest for nine months with respondents blaming the war for the more downbeat outlook.

“March’s PMI numbers clearly underscore how downside growth risks and upside inflation risks have already materialised,” said Williamson. BLOOMBERG