UK faces ‘stagflation’ warning amid rising costs and faltering growth
A survey of businesses found slight growth in the private sector, but companies are still concerned about the prospect of job cuts and inflation.
The UK’s private sector grew slightly in the first weeks of the year, but business confidence kept falling amid warnings of job cuts and rising inflation, according to a survey of firms.
Economists warned that the UK is facing a period of so-called “stagflation”, a period where prices are rising but economic growth and employment are stagnant.
The S&P Global flash UK composite purchasing managers’ index (PMI) reported a reading of 50.9 for January, ahead of December’s figure of 50.4.
While the figure is a three-month high, and came in ahead of economist expectations, businesses taking part in the poll said they were still concerned about cuts to employment amid falling sales.
The reading will add to concerns of lagging economic growth and a weakening jobs market after Chancellor Rachel Reeves raised employment taxes for businesses in the October Budget.
The flash figures are based on preliminary data. Any score below 50 indicates that activity is contracting, while any score above means it is growing.
The uptick in activity was largely down to growth in the service economy, which makes up the majority of Britain’s private sector, while the smaller manufacturing industry contracted slightly.
But the costs facing companies continued to grow, with so-called input cost inflation hitting its highest level since May 2023, while business confidence fell for the sixth consecutive month.
And employment continued to fall across the private sector, continuing a trend which started in October last year, economists said.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The first indicators of business conditions in 2025 add to the gloom about the UK economy, with companies cutting employment amid falling sales and concerns about business prospects.
“Inflation pressures have meanwhile reignited, pointing to a stagflationary environment which poses a growing policy quandary for the Bank of England.
“While output growth ticked higher, the improvement does little to move the dial on a speedometer which points to an economy that is broadly flatlining.
“The subdued business activity seen in January was accompanied by sustained downbeat business optimism about future prospects, the mood remaining the darkest seen for two years, and a further worsening of the demand environment, as reflected in falling order books.”
Thomas Pugh, economist at RSM UK, said the reading suggests that confidence is “slowly starting to return after the twin shocks of the budget and threat of US tariffs”.
“There are good reasons to expect confidence to improve over the next few months, and for growth to be stronger than suggested by the PMI, though.
“Firstly, the worst of the recent turmoil in gilt markets seems to have receded. If the Bank cuts interest rates in early February as expected, this would further help to stabilise markets.
“Secondly, the PMI doesn’t cover government spending or investment, which is set to rise sharply. This will provide a powerful tailwind for the economy.”
