Eurozone PMI Signals Contraction as War Fuels Inflation

Eurozone PMI falls into contraction territory in April as the Middle East war drives inflation and disrupts supply chains.

The eurozone economy slipped into contraction territory in April as the ongoing Middle East conflict disrupted supply chains and pushed inflation sharply higher, according to fresh PMI data from HCOB.

Manufacturing activity beat expectations, with the PMI rising to 52.2 against a forecast of 50.9. However, analysts warn the gain reflects clients rushing to secure shipments amid fears of widespread supply shortages and rising costs, a dynamic also visible in the French and German reports released earlier. Frontloading of orders, rather than genuine demand growth, is driving the uptick.

Meanwhile, surging input price inflation has emerged as the central concern for businesses and policymakers alike, including the European Central Bank. Price pressures are gradually filtering down through the supply chain. For now, households are absorbing mainly higher fuel costs, but as businesses begin passing on rising operating expenses, core consumer prices will face mounting upward pressure.

Eurozone PMI Signals Contraction as War Fuels Inflation

The services sector took a significant hit in April, registering a steep decline in activity. That deterioration bodes poorly for the economic outlook heading into summer.

The April flash Composite PMI moved into contraction for the first time since late 2024, signalling a quarterly GDP decline of 0.1%,  a reversal from the 0.2% growth recorded in the first quarter. Business activity in the services sector fell at a pace not recorded since the pandemic lockdowns of early 2021.

On the manufacturing side, companies ramped up input purchases at a rate unseen since early 2022, as supply chain delays widened to their most widespread since the pandemic. Input costs and selling prices both jumped, not only because of higher energy bills, but also due to a broader rise in commodity prices and a mismatch between demand and constrained supply. Excluding the COVID-19 pandemic, HCOB described it as the sharpest surge in cost pressures since 2000.

Business confidence deteriorated further, with sentiment falling to its lowest level since late 2022.

“The eurozone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers. The conflict has pushed the economy into decline in April, while driving inflation sharply higher.”

“In this environment, the ECB once again has the unenviable task of deciding whether to raise interest rates in the face of the worrying inflation picture, or whether this price spike will prove temporary and its focus should instead be on the need to prevent the economy sliding into a deeper downturn.”

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