UK private sector activity contracts for second month, raising fears of economic slowdown

The UK’s private sector shrank for the second consecutive month in May, fuelling concerns that the economy’s strong start to the year could be reversed in the second quarter.

The S&P Global/CIPS purchasing managers’ index (PMI) — a key barometer of economic health — rose slightly to 49.4 in May from 48.5 in April, but remained below the crucial 50 threshold that separates growth from contraction. It marks the second-lowest reading in the past 17 months and underscores the fragile state of business conditions.

The PMI figures come just weeks after official data showed the economy had grown 0.7 per cent in Q1, its fastest pace in two years. But that momentum now appears to be stalling amid rising trade uncertainty, higher staff costs and persistent inflationary concerns, raising the prospect of a potential reversal in Q2.

While the UK’s services sector — which accounts for more than three-quarters of the economy — showed a modest rebound, with its PMI ticking up to 50.2 from 49.0, the manufacturing sector continues to deteriorate. Its PMI fell to 45.4, a two-month low, signalling the sharpest decline in output since October 2023.

Manufacturers have been particularly affected by the post-Brexit trade environment, delayed investment decisions, and cutbacks to non-essential spending. The report found that overall manufacturing production fell at its fastest rate in seven months.

“Although brighter news on tariffs and trade appears to have helped restore some confidence among businesses, sentiment about prospects in the year ahead is still subdued,” said Chris Williamson, chief economist at S&P Global.

The PMI data also points to an aggressive wave of job cuts, particularly in manufacturing, as firms struggle with rising wage and tax bills following the April hikes to national insurance contributions and the minimum wage.

Despite a recent improvement in business sentiment — aided by the UK’s partial trade agreement with the US and the Trump administration’s 90-day pause on new tariffs — it appears that these developments have not yet translated into near-term investment or hiring confidence.

“Concerns about weak demand have been exacerbated by the rise in staff costs,” Williamson added.

Economists at Capital Economics warned that the PMI readings for April and May are consistent with a GDP contraction of 0.2 per cent in Q2, which would mark the worst quarterly performance since late 2023.

The findings come amid broader signs of economic fragility across Europe. The eurozone’s equivalent PMI slipped into negative territory this month, falling from 50.4 to 49.5, highlighting shared pressures across advanced economies.

While businesses remain hopeful that recent improvements in global trade conditions could offer some relief in the second half of the year, the latest PMI data adds to the growing list of headwinds facing UK growth — including higher input costs, cautious consumer spending, and lingering geopolitical risks.

As the government prepares for its upcoming spending review, and the Bank of England weighs further interest rate decisions, the latest figures will likely reinforce calls for targeted support to protect jobs and stimulate investment, particularly in the struggling industrial sector.

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UK private sector activity contracts for second month, raising fears of economic slowdown