UK manufacturers recorded the steepest monthly jump in costs since 1992, as rising oil prices linked to the Middle East conflict push inflationary pressures to levels not seen in over three decades. The latest Purchasing Managers’ Index (PMI) signals a slowdown in economic growth across manufacturing and services, raising fresh concerns about the UK’s economic trajectory this year.
Costs Soar to Unseen Levels Since Early 90s
March’s PMI data from S&P Global Market Intelligence revealed a 14-point surge in manufacturers’ cost inflation compared to February—a leap only outpaced once before, after Black Wednesday in 1992. Back then, sterling’s sharp fall following the UK’s exit from the European Exchange Rate Mechanism sent import costs soaring. Now, the conflict between the US, Israel, and Iran has driven oil prices up by nearly 50% since late February, while gas prices have more than doubled, according to market data.
These energy cost rises have hit manufacturers hard. Fuel, transportation, and energy-intensive raw materials are the main drivers behind the price hikes, as companies face higher bills and disrupted supply chains. Without an energy price cap, businesses face the full brunt of market swings, which makes controlling costs really tough.
Economic Growth Slows to a Crawl
The composite PMI, which covers both manufacturing and services, slipped to 51 in March, barely above the 50 mark that separates growth from contraction. This marks the slowest pace of expansion in six months, indicating that the UK economy is losing momentum amid the worsening cost pressures and geopolitical uncertainty.
Chris Williamson, chief business economist at S&P Global, described the situation bluntly: output growth across manufacturing and services has “slowed to a crawl” as companies report lost business. The reasons are manifold — higher interest rates, price pressures, risk aversion from customers, and disruptions to travel and supply chains all play a part.
Retail Sector Also Shows Signs of Strain
The retail industry isn't immune to these headwinds.
The Confederation of British Industry (CBI) flagged March as the month with the fastest annual decline in sales volumes since April 2020, during the height of Covid lockdowns. Although the CBI didn't explicitly link this to the Middle East conflict, its lead economist Martin Sartorius pointed to weak economic conditions and subdued household spending as ongoing drags.
The CBI’s retail sales balance plunged from -43% in February to -52% in March, underscoring the fragile state of consumer demand. These figures suggest that rising costs and inflation are filtering through to shoppers, squeezing their budgets amid an already challenging economic environment.
Implications for Monetary Policy and Future Growth
The Bank of England faces a tough choice because rising energy inflation complicates their policy decisions. On the one hand, the central bank wants to prevent inflation from becoming entrenched, especially if energy prices keep pushing costs higher. On the other, aggressive interest rate hikes risk choking off the fragile recovery and dragging the UK into recession.
Financial markets have priced in a 0.5 percentage point rise in the Bank rate by the end of 2026. Morgan Stanley has warned the UK economy could face a “pronounced recession” later this year due to the combined pressures of soaring energy costs and higher borrowing rates.
Employment in manufacturing has also seen a decline, with job numbers falling for the 18th consecutive month. This points to deeper challenges within the sector as businesses adjust to cost pressures and weakening demand.
Looking Back and Forward
The current inflation spike recalls the turmoil of the early 1990s when sterling’s crash sent costs soaring and weighed heavily on UK industry. But today’s pressures come mostly from external geopolitical shocks rather than currency movements. The damage to energy infrastructure in the Gulf means oil and gas prices may remain elevated even if a ceasefire is reached soon.
Emily Sawicz, industrials senior analyst at RSM UK, highlighted the ongoing uncertainty: "Geopolitical tensions remain a key concern for UK manufacturers, and the recovery many hoped to see in 2026 now looks delayed at best." The situation is risky, and these challenges could change the UK’s economic outlook in the near future.
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Rising energy prices linked to the Middle East conflict are pushing up costs sharply, which could slow the UK’s economic recovery and complicate the Bank of England’s fight against inflation. It's still unclear if manufacturers and retailers will manage to get through these challenges as the year goes on.
This article was created with AI assistance.
