British businesses have reported their first expansion in three months, offering an early vote of confidence in the UK’s new Labour government and tentative evidence that the economy is absorbing the shock of the Iran conflict more resiliently than feared.

A flash survey from S&P Global showed the **UK Composite Purchasing Managers’ Index (PMI)** rising to 52.1 in July from 49.3 in June, the strongest reading since February and comfortably above the 50 threshold that separates contraction from growth. The figure surprised economists, having beaten all forecasts in a Reuters poll that predicted only a marginal improvement to 49.7.

Early boost for Burnham as sentiment turns

The data will be welcomed in Downing Street, where new Prime Minister Andy Burnham has taken office amid concerns that war in Iran, energy market volatility and persistent inflation could derail the UK’s fragile recovery. July’s upturn was driven by a brief respite in hostilities, which eased cost pressures and allowed firms to rebuild order books.

Business optimism rose to its highest level since the conflict began, according to the survey, suggesting companies now expect output and hiring to improve over the coming year as long as geopolitical risks do not re‑escalate. Analysts said the shift in sentiment may give the Treasury and the Bank of England slightly more room to manage the trade‑offs between growth and inflation.

Services and manufacturing move back into growth

Both of the UK’s major private‑sector engines – services and manufacturing – recorded expansion in July, reversing three months of decline. The flash **services PMI** climbed to 51.8 from 48.8, its strongest showing since April, pointing to renewed growth in areas such as business services, hospitality and transport.

Manufacturers also reported stronger activity, with the **manufacturing PMI** edging up to 52.8 from 52.5. Although the increase was modest, the sector has now remained above 50 for several months, hinting at a degree of resilience despite higher borrowing costs and softer demand from some export markets.

Economists cautioned that flash PMIs are provisional and can be revised, but noted that the breadth of the improvement – spanning output, new orders and business expectations – marked a meaningful shift from the stagnation seen in the spring.

Cost pressures ease as Iran conflict pauses

A key driver of the better data was a cooling in input cost pressures, partly linked to a temporary easing in the Iran war and its impact on energy and shipping markets. Earlier disruption, particularly around the Strait of Hormuz, had pushed up fuel and logistics costs and renewed fears of higher global interest rates. July’s survey suggests some of those pressures have abated, at least for now, giving firms breathing space on margins.

While wage growth and some imported costs remain elevated, the overall rate of increase in firms’ expenses slowed, and fewer companies reported passing higher prices on to customers. If sustained, this pattern could support the Bank of England’s efforts to bring inflation closer to its 2% target without inflicting further heavy damage on output.

Contrasting picture with recent growth data

The PMI surprise comes against a backdrop of relatively weak official growth figures, underlining the mixed signals facing policymakers. Recent data from the Office for National Statistics confirmed that UK GDP grew just 0.3% in the second quarter, with output flat in July after a stronger June and production in notable decline. That slowdown has been blamed in part on households and businesses bringing forward activity, such as housing transactions, to beat earlier tax changes.

Taken together, the PMI and GDP data suggest that while the UK economy remains subdued, it may not be sliding into a deeper downturn. The latest survey could indicate that momentum is stabilising – or even tentatively improving – after a soft patch in the spring and early summer.

Policy and market implications

Markets and policymakers will be watching the PMIs closely for clues on the timing and scale of future interest rate moves. A stronger‑than‑expected rebound in activity, combined with easing cost pressures, might encourage the Bank of England to hold rates steady for longer rather than tighten further, depending on how inflation evolves.

For Andy Burnham’s government, the figures provide early validation of a pro‑growth agenda built around industrial strategy, infrastructure and public investment. Although the survey predates many of the administration’s detailed policy announcements, improving sentiment among businesses could make it easier to secure support for reforms in areas such as planning, skills and regional development.

What businesses are watching next

• Geopolitical risk: Any renewed escalation in Iran or wider regional tensions could quickly reverse the easing in cost pressures, particularly for energy‑intensive sectors.
• Interest rates: Firms remain sensitive to borrowing costs, especially in property, construction and capital‑intensive manufacturing.
• Consumer demand: The sustainability of the services rebound will hinge on household incomes and confidence as earlier cost‑of‑living pressures gradually fade.
• Government policy detail: Business leaders are looking for clarity on tax, regulation and investment incentives under the new administration.

For now, the July PMIs mark a rare piece of positive news for the UK economy: a broad‑based return to growth, improved confidence and a hint that the worst of the war‑related cost shock may be passing. Whether that optimism endures will depend on a fragile balance of geopolitics, monetary policy and the new government’s ability to turn sentiment into sustained investment and hiring.