The UK’s private sector saw slight growth in the early weeks of 2025, but concerns about rising costs, faltering economic growth, and job cuts continue to dominate the business landscape.
A recent survey of firms has raised alarms about a potential period of “stagflation”—a situation where inflation is rising, but economic growth and employment remain stagnant.
The S&P Global flash UK composite purchasing managers’ index (PMI) reported a reading of 50.9 for January, slightly up from December’s figure of 50.4.
While this represents a three-month high and exceeded economist expectations, businesses involved in the survey expressed concerns about ongoing job cuts and falling sales, signalling that growth is fragile at best.
Economists are warning that the UK could be entering a stagflationary period, where high inflation is coupled with stagnant economic activity and a weak jobs market.
This warning comes as businesses face increasing input costs and reduced confidence in future prospects. Despite the modest uptick in economic activity in January, there are growing fears about the long-term stability of the economy.
The private sector’s growth in January was mainly driven by the service sector, which constitutes the majority of Britain’s private economy, while the smaller manufacturing sector experienced a slight contraction.
However, inflation pressures are intensifying, with input cost inflation hitting its highest level since May 2023, further complicating the economic outlook.
The survey also revealed that business confidence has been declining for six consecutive months. Employment in the private sector continues to fall, following a downward trend that began in October 2024. With businesses facing rising costs and concerns over declining sales, many are considering job cuts to stay afloat.
Chris Williamson, chief business economist at S&P Global Market Intelligence, commented, “The initial data for 2025 paints a bleak picture for the UK economy.
Companies are cutting employment due to falling sales, while inflationary pressures are resurging, creating a stagflationary environment. The Bank of England now faces a growing policy dilemma.”
While output growth improved slightly in January, it is unlikely to significantly shift the economic trajectory, which remains broadly flat. Williamson noted that business optimism is at its lowest point in two years, with a further deterioration in demand reflected in declining order books.
The overall mood among UK businesses is one of caution, with ongoing challenges in both the supply and demand sides of the economy. Inflation is once again a major concern, and the private sector’s inability to expand rapidly raises questions about how the economy will perform in the coming months.
