UK Economy Shows Early Signs of Stagnation in Q3 2025: PMI Data Signals Challenges Ahead

Composite PMI Falls Below Expectations Amid Trade, Tax, and Wage Pressures

The UK economy is facing early signs of stagnation as July’s flash Purchasing Managers’ Index (PMI) data revealed a decline in business activity at the start of the third quarter of 2025. The composite PMI dropped to 51.0 in July from 52.0 in June, falling short of the consensus forecast of 51.7. The PMI, which tracks business conditions in services and manufacturing, suggests the UK economy continues to struggle with multiple challenges.

Key Points:

• Services Sector Struggles: The primary driver of the overall decline was the services sector, with its PMI dropping to 51.2 from 52.8 in June. This indicates weaker demand and higher business costs, likely impacted by higher US tariffs, UK stamp duty increases, National Insurance Contributions for employers, and minimum wage hikes.
• Manufacturing Shows Improvement: On a positive note, manufacturing output showed modest improvement, with its PMI rising to 50.0, marking the threshold between growth and contraction, up from 47.0 in June. This suggests that manufacturing may be stabilizing, albeit at a low level of activity.

Employment Conditions Deteriorate

Despite some improvements in manufacturing, employment conditions continued to deteriorate, with the composite employment balance falling further to 45.1 from 46.6 in June. This points to an ongoing decline in payroll employment, signaling that companies are cautious about expanding their workforce in the face of uncertain economic conditions.

On a three-month basis, the rate of employment decline is around 0.2%, slightly better than the 0.3% contraction recorded in June, but still indicative of a sluggish labor market.

The services output prices balance rebounded slightly to 54.7 in July from 52.9 in June, reversing part of last month’s sharp decline. This uptick suggests that services inflation could potentially slow, with services CPI inflation expected to fall from 4.7% in June to below 4.0% over the next six months. This trend supports expectations that the upside risks for inflation are fading.

Outlook and Bank of England’s Response

Despite the stronger-than-expected inflation and labor market data released last week, the overall economic picture indicates that the risks of further inflationary pressures are decreasing. The Bank of England (BoE) is likely to take these signals into account as it considers its monetary policy stance.

With inflation risks moderating, there is growing speculation that the Bank of England could proceed with interest rate cuts. The central bank is expected to lower its benchmark rate from the current 4.25% to 4.00% in August 2025, with quarterly cuts of 25 basis points expected to follow.

The latest PMI data paints a mixed picture of the UK economy, with weakness in services, some improvement in manufacturing, and deteriorating employment conditions. The combination of higher tariffs, tax hikes, and wage increases continues to weigh on growth. However, the declining inflationary pressures could pave the way for more accommodative monetary policy from the Bank of England, providing some support to the economy in the months ahead.