UK service firms face first output decline since april 2025, PMI shows

British services firms recorded a modest decline in activity in May as rising costs linked to the Iran war and weakening demand weighed on business conditions, according to a survey released on Wednesday.

The S&P Global Purchasing Managers' Index (PMI) for Britain's services sector fell to 49.3 in May from 52.7 in April.

The reading marked the first contraction in output since April 2025.

However, it came in above the preliminary flash estimate of 47.9.

A PMI reading below 50 indicates contraction, while a reading above 50 signals growth.

The decline in services activity came on the same day that the OECD slightly raised its growth forecast for Britain in 2025.

The organisation increased its projection to 0.9% from the 0.7% forecast issued shortly after the outbreak of the Middle East conflict.

Despite the deterioration in services activity, the downturn indicated by the PMI survey was less severe than that seen in the euro zone.

Survey respondents reported weaker demand from both domestic and overseas customers during May, contributing to the slowdown in business activity.

The composite PMI, which combines services and manufacturing data, was revised higher to 49.7 from a preliminary estimate of 48.5.

However, the reading remained below April's level of 52.6, signalling an overall decline in private-sector activity.

Inflation pressures remain elevated

While activity weakened, inflationary pressures remained strong across the services sector.

The PMI measure of input cost inflation eased slightly in May but remained at its second-highest level since December 2022, a period that followed Russia's full-scale invasion of Ukraine.

Businesses reported that higher energy, fuel, and transport costs, along with rising salaries, contributed to the increase in operating expenses.

Companies responded by passing these costs on to customers.

The survey showed firms raised prices at the second-fastest pace in three years, only marginally below the increase recorded in April.

Tim Moore, economics director at S&P Global Market Intelligence, said ongoing concerns about inflation and geopolitical risks continued to affect sentiment.

"Worries about a prolonged spike in inflationary pressures, combined with elevated geopolitical tensions and subdued demand, continued to weigh on business activity expectations in May," Moore said.

Bank of England faces policy dilemma

Despite the inflation concerns highlighted by the survey, the Bank of England is widely expected to leave interest rates unchanged at its upcoming policy meeting.

Markets on Tuesday priced in a 90% probability that the central bank would keep borrowing costs at 3.75% when it announces its decision on June 18.

Governor Andrew Bailey has taken the view that policymakers have time to assess the economic impact of recent developments before making further decisions on interest rates.

However, Bank of England policymaker Megan Greene suggested that inflation pressures may be extending beyond energy-related sectors.

Speaking at the University of Derby on Tuesday, Greene said services firms are not heavily exposed to energy costs were still increasing prices significantly.

Confidence falls, and hiring continues to decline

Business sentiment regarding the year ahead weakened further in May.

According to S&P Global, confidence fell to its lowest level since April last year, when sentiment dropped sharply following the announcement of a broad range of trade tariffs by US President Donald Trump.

Employment conditions also remained under pressure.

Hiring declined for the 20th consecutive month, marking the longest uninterrupted period of job losses since early 2010.

Matt Swannell, chief economic adviser to forecasters ITEM Club, said policymakers were facing increasingly difficult choices.

The survey highlights the challenge facing Britain's economy, where slowing activity, persistent inflation pressures, and weakening confidence are occurring simultaneously, creating a difficult environment for both businesses and policymakers.