By David Milliken LONDON, March 24 (Reuters) - British business activity grew at the slowest pace in six months in March as conflict in the Middle East triggered the biggest month-on-month
UK businesses show growth and inflation hit from Iran war
Impact of the Iran Conflict on UK Business Activity and Inflation
By David Milliken and William Schomberg
Slowing Growth and Rising Costs
LONDON, March 24 (Reuters) - British business activity has grown at the slowest pace in six months and manufacturers' input costs accelerated at the fastest rate since 1992, according to a survey that underscores the risks to the government's economic agenda from the Iran conflict.
The S&P Global Purchasing Managers' Index is the first major survey to show the impact on British businesses from the U.S.-Israeli war on Iran which is expected to slow already weak growth and push up inflation.
The preliminary composite Purchasing Managers' Index, covering manufacturers and non-retail services businesses, sank to 51.0 in March from 53.7 in February which was the joint-highest since August 2024.
Expert Commentary on Economic Risks
"March's flash PMIs show that the conflict in the Middle East is already going a long way to boosting inflation and extinguishing GDP growth. And this is just the start," Paul Dales, chief UK economist at Capital Economics, said.
Manufacturers Face Surging Input Prices
S&P Global's gauge of input prices for British manufacturers - which measures how fast costs are rising - jumped to 70.2 in March from 56.0 in February, the biggest leap from one month to the next since sterling tumbled out of Europe's Exchange Rate Mechanism in 1992.
Drivers of Cost Increases
Higher prices for fuel, transport and energy-intensive raw materials were the main reasons for the increase, S&P said.
"It's no surprise that the surge in energy prices triggered by the Middle East conflict has weakened activity and raised prices – that’s textbook. But we are a bit struck by how rapid the moves have been," Dales said.
Comparisons and Broader Economic Context
The survey's headline reading was below all forecasts in a Reuters poll of economists, though above the 50-level that divides growth from contraction.
It was also higher than it was in some of the run-up to finance minister Rachel Reeves' budget in November when many businesses feared they would be hit with higher taxes.
The equivalent PMI for the euro zone fell much less sharply, dropping to 50.5 in March from 51.0 in February.
Political and International Developments
Although President Donald Trump paused some attacks on Iran on Monday and said there had been productive talks, British Prime Minister Keir Starmer said the government needed to plan on the basis that the conflict could continue for some time, and on Tuesday Iran launched waves of missiles at Israel.
Reeves was due to address parliament on Tuesday on the impact of the war on the economy, which she had promised to boost before an election in 2024, and on possible support measures for energy users.
Inflation and Monetary Policy Challenges
Factories' Raise Prices at Fastest Pace in Almost a Year
Businesses said they raised their prices at the fastest rate since April 2025 - sharpening the dilemma for the Bank of England on whether it needs to raise interest rates to tame inflation risks at a time when the economy is slowing.
Bank of England's Response
Last week the BoE kept rates on hold and said it was ready to take further action if needed as it forecast inflation would rise toward 3.5% in the middle of this year. Previously, the BoE had forecast inflation would fall to around 2% in April.
Expert Analysis on Inflation Pressures
Jake Finney, senior economist at PwC, said the pickup in inflation pressures alongside weaker demand showed the conundrum facing the BoE.
"The key judgment for Monetary Policy Committee members will be how long the conflict is likely to last and whether higher energy prices will trigger a broader resurgence in inflation pressures," Finney said.
Business Outlook and Employment Trends
The PMI survey showed British businesses' expectations for future output were the weakest since June 2025. Employment fell for the 18th month in a row, the longest unbroken run of declines since 2010.
"Companies blamed lost business directly on the events in the Middle East, whether through heightened risk aversion among customers, surging price pressures, higher interest rates, or via travel and supply chain disruptions," Chris Williamson, chief business economist at S&P Global Market Intelligence, said.
(Writing by David Milliken and William Schomberg; Editing by Hugh Lawson)
