UK private sector shrinks as Starmer crisis adds to Iran shock

[LONDON] British businesses posted the first decline in output in over a year as the Iran shock and a mounting rebellion against Prime Minister Keir Starmer hit activity in the services sector, a survey showed. 

S&P Global’s purchasing managers’ index dropped to 48.5 in May from 52.6 in April, according to preliminary estimates. The reading was much worse than the 51.6 score expected by economists and below the 50 threshold separating growth from contraction.

The last time that Britain’s private sector contracted was in April 2025, when US President Donald Trump’s tariffs hit orders from abroad. Now, political turmoil at home is damaging sentiment just as the Middle East crisis pushes up the price of raw materials. 

The survey will deliver a further blow to Starmer’s Labour government, which has struggled to deliver on its promise to boost economic growth. The prime minister’s position is looking increasingly precarious after disastrous losses in local elections this month triggered pressure from within his Labour Party for him to resign.

“The UK economy is facing a perfect storm,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. While the Middle East conflict remains top of mind for businesses, Williamson added that “domestic politics are taking an increasing toll, driving uncertainty higher, in turn deterring spending, hiring and investment.”

The findings suggest the economy contracted at a quarterly rate of 0.2%, S&P said. It adds to the case for the Bank of England to hold off raising interest rates next month, after figures this week showed a weak jobs picture and softer-than-expected inflation. Policymakers have to balance downside risks against worries that the energy shock will trigger an inflationary spiral.

May’s decline in activity was driven by the powerhouse services sector, where activity contracted at the sharpest pace since the depths of the pandemic in 2021. Outside Covid, it was the lowest reading since the aftermath of the Brexit referendum in 2016. Services firms said that domestic politics weighed on confidence, while the war in Iran prompted consumers to postpone spending, particularly for international travel.

Manufacturing continued to grow, with production volumes expanding at the fastest pace in three months. However, the boost is likely to be temporary. Factories noted clients were stocking up to avoid price hikes and potential supply disruptions. 

The impact of the conflict showed signs of intensifying. Manufacturers raised prices at the fastest pace since 2022 as they try to pass on rising fuel costs. Most services and manufacturing firms said average cost burdens worsened in May, blaming oil prices, higher raw material costs and wage pressures.

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Firms cut jobs for the 20th month, with the drop in payrolls mainly driven by falling employment in the services sector. 

Business sentiment declined to the lowest since April 2025, as heightened geopolitical turmoil, rising inflation and sluggish consumer spending sapped expectations for the year ahead.

“Things could well get worse in the coming months, as we have been seeing some support to manufacturing from precautionary stock building which will inevitably fade once warehouses are full,” Williamson said. BLOOMBERG