Business activity in the euro area unexpectedly shrank for the first time since late 2024 due to a steep drop in the services sector as the Iran war weighs on consumers.
The Composite Purchasing Managers’ Index compiled by S&P Global declined to 48.6 in April from 50.7 the previous month, dropping below the 50 threshold separating growth from contraction. Analysts had predicted a dip to 50.1.
The trend was similar in Germany, where industry held up while services plummeted. In France, manufacturing actually surpassed expectations with its strongest performance since 2022 even as services sank. Price pressures continued to build across the region.
“The euro zone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers,” Ch euro zone is facing ris Williamson, chief business economist at S&P Global Market Intelligence, said Thursday in a statement. “Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding more upward pressure to prices in the coming weeks.”
The surprise weakness will worry the European Central Bank, which is expected to refrain from action on interest rates when it meets this month. While the region has already seen inflation jump well beyond the 2% target, policymakers are awaiting more data on how persistent the jolt to prices will prove. Markets are pricing two hikes by year-end.
The higher energy costs that are behind the upswing in inflation are also weighing on output which was expected to gain momentum before the conflict broke out. Hundreds of billions of euros in defense and infrastructure outlays, especially by Germany, will help cushion the blow. Some governments are also stepping in to offer assistance as prices for things like gasoline soar.
The ECB predicted in March that gross domestic product will rise 0.9 per cent in 2026 and 1.3 per cent in 2027, though officials have recently said the euro area is somewhere between that outcome and an adverse scenario assuming a longer war that brings more meagre growth.
Williamson warned that gloom among businesses has pushed sentiment down to its lowest since late 2022, with data Wednesday showing consumer confidence suffering similarly.
He also cautioned against excessive optimism over the relative outperformance by manufacturers.
The sector’s growth “comes with something of a sting in the tail, as demand for goods is being buoyed by stock building as companies scramble to secure purchases ahead of further price hikes or supply shortages.”
Turning to inflation, Williamson said input costs and selling prices have jumped not just in response to higher energy prices but also reflecting a broader upturn in commodity prices and a mismatch of demand against constrained supply.
“If the Covid-19 pandemic is excluded, this is the biggest surge in cost pressures that we have recorded since 2000,” he said.
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
A composite reading for the UK is likely to have slipped below 50, while the gauge for the US is expected to remain above that level. - Bloomberg
