UK services sector activity slumps to decade low amid political uncertainty, war impact

The UK’s dominant services sector has experienced one of its sharpest declines in business activity in a decade, according to a closely watched purchasing managers’ index.

Companies are grappling with a “perfect storm” of domestic political uncertainty surrounding Prime Minister Keir Starmer’s leadership and the growing impact of the Iran war, leading to soaring costs, supply shortages and job cuts, the report said.

The S&P Global purchasing managers’ index (PMI), which surveys hundreds of companies across the UK each month, found activity among services firms was the weakest since January 2021 and the lowest since July 2016 if the Covid-19 pandemic period is excluded.

The services sector, encompassing hospitality, retail, finance and IT, accounts for approximately 80% of the UK economy, meaning its performance significantly affects GDP growth.

The downturn pulled the PMI’s composite output index, which scores private sector performance across manufacturing and services, below the 50-point threshold that separates growth from contraction.

The composite index registered 48.5 for May, down from 52.6 in April, far worse than the 51.6 forecast by economists and the lowest reading since April 2025.

Andrew Wishart, an economist at German bank Berenberg, said if the slump in the PMI were to continue, it would point to “GDP growth collapsing” from an expansion of 0.6% in the first quarter of this year to -0.2% in the second quarter.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The blame lies first and foremost with the war in the Middle East, though companies are also noting that domestic politics are taking an increasing toll, driving uncertainty higher, in turn deterring spending, hiring and investment.”

The index also showed private sector payroll numbers falling for the 20th successive month, largely because of “a faster pace of job shedding” in the services sector, mirroring Office for National Statistics data released this week showing payrolled employees dropped at the sharpest rate since 2014 in April, falling by 100,000 after a 28,000 decline in March.

The fall in services sector activity outweighed an upturn in UK manufacturing, where companies reported customers “front-loading” orders to beat future price rises and potential supply disruptions, pushing manufacturing activity to a three-month high despite international shipping delays in the Gulf causing some supply chain issues.

A separate report from the business lobby CBI said manufacturers reported their lowest order books since 2020 in May and expected demand to fall further in the next three months, suggesting a mixed picture in the sector.

Economists said May’s PMI survey was the latest data to indicate the Bank of England can probably hold off raising interest rates from 3.75% at its next meeting in June, after official figures this week showed the UK inflation rate slowed to 2.8% in April from 3.3% in March, while wage growth slowed to 3.4%, suggesting the economy was not experiencing runaway inflation.

Paul Dales, chief UK economist at Capital Economics, said: “By showing that weaker activity may be starting to restrain price rises, May’s flash PMIs are the third set of figures in three days that suggest the Bank of England does not need to rush to raise interest rates.”