LONDON/FRANKFURT, March 24 (Reuters) – Euro zone private sector growth nearly stalled this month, a key survey showed on Tuesday, adding to mounting evidence that the bloc is already suffering the economic fallout from the U.S. and Israeli war with Iran.
With oil prices up by two-thirds since the start of the year, euro zone inflation is already rising and economic growth is set to take a hit as expensive fuel saps household purchasing power, lowers corporate profit margins and hits confidence.
The S&P Global flash euro zone Composite Purchasing Managers’ Index fell to a 10-month low of 50.5 in March from 51.9 in February, as the war drove input costs to their highest in more than three years and triggered the worst supply chain disruptions since mid-2022.
“The flash euro zone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.
The PMI fall comes as German figures held up relatively well, with other major economies taking a bigger hit, including France, where business confidence tumbled.
Separate data a day earlier showed consumer confidence in the bloc falling to its lowest level since late 2023 in one of the biggest falls on record, tumbling deep below its long-term average as the economic pain takes its toll on households.
STAGNATION BUT NO RECESSION
“The economic hit from higher energy prices could be felt very quickly,” Jack Allen-Reynolds at Capital Economics said. “Based on our working assumptions for energy prices, we suspect that the economy will stagnate rather than contract, but there are clearly risks in both directions.”
Interest rates are rising as banks anticipate hikes from the European Central Bank to curb inflation, and this has already pushed some mortgage rates higher to dent disposable incomes.
Meanwhile petrol prices have risen by more than 10% across the EU and diesel is up over 20%. Even if the war is ended relatively soon, these prices are unlikely to fall quickly as some energy infrastructure is damaged and fuel bottlenecks may take several months to resolve.
This is why the ECB already said that inflation, at its 2% target for the past year, will surge to at least 2.6% under its more benign scenario. But risks are skewed to much higher readings.
Central banks normally look past such energy-driven inflation shocks but markets are betting on quick rate hikes this time, mostly because a similar shock in 2021/22 proved to be lasting and central banks reacted late.
Tuesday’s PMI data pointed to euro zone gross domestic product growth slowing to a quarterly rate of just below 0.1% in March, with forward-looking indicators suggesting a heightened risk of a downturn in coming months.
Detailed PMI figures showed that new orders – a key gauge for demand – fell for the first time in eight months, driven by weakness in the services sector. Manufacturing orders continued to expand, although the output reading in the sector dipped to 51.7 from 51.9 the previous month.
Overall input costs jumped at the fastest pace since February 2023, with both manufacturing and services facing steeper inflation. The acceleration was more pronounced in manufacturing as energy prices surged and supply chains became choked due to the conflict.
(Reporting by Jonathan Cable and Balazs Koranyi; Editing by Hugh Lawson)
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