The UK’s services sector experienced its steepest decline in activity in three-and-a-half years during June, according to a closely watched survey, as the ongoing conflict in Iran drove up business costs and dampened client demand. The S&P Global UK services PMI registered 48.8 in June, down from 49.3 in May and marking the lowest reading since January 2023. A reading below 50.0 signals contraction, and June was the second consecutive month of declining activity, reversing a period of growth that had lasted over a year.
Impact of Middle East Conflict and Political Uncertainty
Businesses across the sector—including hospitality, leisure, transport, and financial and professional services—reported lacklustre economic conditions and heightened risk aversion among clients linked to the Middle East conflict. The survey also noted that political uncertainty in the UK, following Prime Minister Sir Keir Starmer’s resignation announcement last month, negatively affected client confidence. Starmer stepped down after weeks of pressure from Labour MPs, with Andy Burnham emerging as the frontrunner to succeed him.
The combination of these factors led to a fourth consecutive monthly decline in new work received by service sector companies. Some consumer-facing businesses also pointed to the late-June heatwave as a factor reducing footfall in shops.
World Cup Boost for Hospitality
Despite the overall gloom, some hospitality firms reported a boost from the FIFA World Cup, as supporters flocked to pubs and venues to watch matches. Millions of people across England went to their local pubs to watch the Women’s World Cup final, providing a temporary lift to the sector.
Cost Pressures and Job Cuts
Tim Moore, economics director at S&P Global Market Intelligence, said: “June data confirmed a clear loss of momentum for the UK economy during the second quarter of 2026, following a positive start to the year. Strong cost pressures, lacklustre demand and business uncertainties arising from the Middle East conflict were the most prominent themes highlighted by service sector firms in June. This led to fragile investment sentiment, elevated risk aversion among clients and squeezed consumer budgets, which in turn contributed to the fastest reduction in new work for just over three-and-a-half years.”
Job-cutting continued in June at the fastest rate since February, largely in response to rising business costs. However, the rate at which suppliers were hiking prices slowed last month after accelerating in April in the aftermath of the conflict. “This was largely due to lower fuel prices, but there were still many reports of suppliers passing on higher transport, wage and raw material costs in June,” Moore added.
Economic Outlook
Matt Swannell, chief economic adviser to the Item Club, said: “After a strong first quarter, the UK economy has already shown signs that it’s losing momentum, with GDP falling by 0.1% in April. Despite the recent falls in energy prices, we expect growth to remain weak over the rest of the year. Household real income growth is still expected to slow, financial conditions will remain tight and, even with a change in Prime Minister, we think fiscal policy will remain restrictive in the near term.”
