Businesses hit as ongoing war in Iran hits growth

Any reading above 50.0 means the sector is growing while any reading below signals it is contracting.

May’s score marked the first time business activity has decreased since April 2025.

This was mostly driven by a reduction in the amount of new work for businesses, for the third month in a row, although this was only marginal amid signs of ongoing resilience.

Firms surveyed suggested that worries about the conflict in the Middle East had led to some customers pushing back big spending decisions or cutting back on non-essential purchases.

Export sales also fell back in May, which was linked both to uncertain global economic conditions and increasing competition in major markets.

Services businesses are the dominant industry in the UK, spanning those from hospitality, leisure and travel, through to property, financial services and education.

The war in Iran has had significant ramifications around the world due to the effective closure of the Strait of Hormuz, one of the world’s busiest waterways, since the end of February.

This has cut off the transit of key commodities such as oil and fertiliser from the Middle East and sent global prices soaring.

Businesses in the UK have felt the knock-on impact of rising prices squeezing budgets and weakening consumer sentiment, the latest PMI survey showed.

Tim Moore, economics director for S&P Global Market Intelligence, said: “Many service sector companies noted that the Middle East conflict had an adverse impact on sales pipelines and general business prospects.

“Those in the hospitality and transportation sectors typically commented on squeezed discretionary spending and pressure from sharply rising input costs, while professional services firms reported a setback from rising risk aversion among clients.”

Firms were cutting jobs last month at the fastest rate since February, partly in response to higher labour and business costs, according to the survey.

Respondents said it was costing more to run their business, largely because of higher energy, fuel and transport costs.

But Mr Moore added that businesses making investments into technology services was a “bright spot for parts of the service economy” last month.

Matt Swannell, chief economic adviser to the Item Club, said: “We think the economy will continue to lose momentum and flirt with recession in the second half of the year.

“Rising energy bills and a deteriorating jobs market will squeeze households’ spending power further.

“Meanwhile, tighter financial conditions, elevated costs, and prolonged uncertainty will lead businesses to postpone or cancel some investment plans.”

It comes as figures suggested the UK economy is set for stronger growth than previously expected this year but saw its outlook cut for 2027 amid concerns over the continued impact from the war in Iran.

The Organisation of Economic Co-operation and Development (OECD) warned the conflict is uncertain but “its economic consequences are likely to be felt for some time even after its resolution”.

It cautioned that some countries could enter recession or witness energy shortages if the conflict drags into 2027.

In its latest forecast, it predicted that UK gross domestic product (GDP) will see growth slow to 0.9 per cent, from 1.4 per cent last year.

The drop will be linked to renewed inflationary pressures “squeezing real incomes” and the impact on consumer spending and investment.

Nevertheless, it is stronger than the 0.7 per cent growth previously predicted by the OECD in March, with the improved outlook partly linked to 0.6 per cent growth in the first quarter of this year.

The OECD, however, cut its growth forecast for next year to 1.1 per cent , from 1.3 per cent , amid a steady recovery following the impact of disruption from the conflict.

Forecasts predicted that global economic growth will slow to 2.8 per cent this year, from 3.4 per cent in 2025.

But the OECD said that global growth would slow to as low as 2.1 per cent this year, and 1.8 per cent next year, if “disruptions persist well into 2027”.

The will would result in “potentially pushing some economies into or close to recession”, the economic body said.

Meanwhile, UK inflation is expected to accelerate further as higher fuel and energy prices linked to the conflict hit households and firms.

It said inflation – which was most recently recorded at 2.8 per cent in April – will rise to 3.7 per cent this year and then slow down to 2.4 per cent next year.

This is lower than the previous predictions of 4 per cent for 2026 and 2.5 per cent for 2027.

“Further easing in monetary policy is expected, with the Bank of England looking through the energy shock in 2026 and moving to a neutral stance in 2027 as underlying price pressures ease,” the report added.

Meanwhile, it indicated that unemployment would continue to rise, predicting it would strike 5.5 per cent this year.