The UK’s services sector experienced its sharpest contraction in over three years during June, as rising costs linked to the conflict in Iran and waning demand weighed heavily on the industry, according to recent data. The S&P Global UK Services Purchasing Managers’ Index (PMI) fell to 48.8 last month, down from 49.3 in May, marking the lowest reading since January 2023. Readings below 50 indicate contraction, and June marked the second consecutive month of decline in the sector, ending a period of sustained growth that had lasted more than a year.

The services sector, encompassing hospitality, leisure, transport, and financial and professional services, faced subdued economic conditions. Survey respondents attributed this to heightened client caution stemming from geopolitical instability in the Middle East, particularly the Iran war, as well as political uncertainty within the UK. The ongoing conflict contributed to increasing business costs and a cautious investment climate, while domestic political developments, including the recent resignation of former Labour leader Sir Keir Starmer and speculation over his successor Andy Burnham, further dampened confidence.

Hospitality firms reported mixed outcomes: although many experienced pressure from reduced consumer spending and a late June heatwave that discouraged shopping visits, some benefited from a surge in demand tied to the FIFA World Cup held in the United States. Pubs and venues reported increased patronage from football supporters during the tournament.

In contrast to services, the UK manufacturing sector showed signs of resilience, with output rising to a 21-month peak due in part to strategic stockpiling. Manufacturing firms also reported modest job growth. Nevertheless, the broader economic outlook remains cautious. Employment cuts in services accelerated to the fastest pace since February, driven by higher operating expenses. While supplier price inflation moderated in June — aided by lower fuel costs — firms continued to face elevated expenses related to transport, wages, and raw materials.

Economics director Tim Moore of S&P Global Market Intelligence highlighted the decline in momentum for the UK economy during the second quarter, pointing to strong cost pressures, weak demand, and uncertainty linked to the Middle East conflict as key challenges. He noted that these factors contributed to fragile investment sentiment and the fastest drop in new work for over three and a half years.

Thomas Pugh, chief economist at RSM UK, warned that economic conditions could deteriorate further if speculation around UK fiscal policy intensifies in the near term. Meanwhile, Matt Swannell, chief economic advisor to the Item Club, observed that the UK economy had begun losing steam after a strong first quarter, with GDP contracting by 0.1 percent in April. Despite recent energy price declines, he predicted that growth would remain weak through the remainder of 2026.