Stagflation alarm rings again! Eurozone March PMI hits 10-month low, German and French economies both in distress

Tongtong Finance APP notes that due to the Iran war pushing up inflation and threatening the nascent economic recovery, the growth rate of private sector activity in the Eurozone has fallen to its lowest level since May last year.

The region’s preliminary S&P Global Composite Purchasing Managers’ Index (PMI) dropped from 51.9 last month to 50.5 in March, but still remains above the 50 mark that separates growth from contraction. Analysts previously predicted a slight decline to 51.

Eurozone Private Sector Activity Slows

As the region’s largest economy, Germany’s composite reading declined more than expected but remained above 50. France’s situation is worse, remaining below that level for the third consecutive month. In both countries, the service sector remains weak, while manufacturing performs relatively better.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated Tuesday, “As the Middle East war causes sharp rises in prices and hampers growth, the initial PMI reading for the Eurozone is warning of stagflation,” he said. “Due to soaring energy prices and disrupted supply chains caused by the war, companies’ costs are rising at the fastest pace in over three years.”

The Middle East conflict threatens the already modest economic growth, with markets betting on higher interest rates to curb the re-accelerating inflation. Although there is hope for a quick resolution, signs of lasting damage to oil and natural gas infrastructure have significantly dampened investor sentiment.

The European Central Bank (ECB) is currently in a wait-and-see mode, cautious that U.S. President Trump might change strategies in the near term. However, sources say officials do not rule out raising borrowing costs as early as the next policy meeting in April.

“We haven’t seen stagflation yet, but the risk is moving in that direction,” said Boris Vujicic, a member of the ECB Governing Council, in an interview, urging colleagues to remain “highly flexible and vigilant.”

Davis Powell, a senior economist at BE Eurozone, pointed out: “The Eurozone PMI indicates that economic activity has significantly slowed due to the Middle East war. Additionally, as the expected boost to manufacturing in March fades, the situation could worsen further in the coming months. The ECB may have underestimated the negative impact on output and might ultimately have to tone down its hawkish rhetoric.”

After the PMI data was released, the yield on 10-year German government bonds remained around 3%, and the euro continued to decline, falling 0.2% to $1.1593. The currency markets are increasing bets on monetary tightening, with expectations of about 70 basis points of rate hikes by year-end.

S&P Global states that the PMI indicates the largest decline in future output expectations since the Russia-Ukraine conflict began four years ago, and input prices are rising at the fastest pace since February 2023.

“The outlook depends on the duration of the war and any lasting impacts on energy and supply chains, but the initial PMI data highlight that the ECB is no longer in its ‘comfort zone’ regarding growth and inflation,” Williamson said. Facing clear and rising stagflation risks in the coming months, “it will have to adopt a cautious policy approach.”

PMI indices are closely watched by markets because they are released early in the month and can effectively reveal economic trends and turning points.

As an indicator of the breadth rather than depth of output changes, business surveys sometimes do not directly correspond to quarterly GDP. The UK composite reading fell more than expected but remained above 50. The US indicators, scheduled for release later the same day, are expected to stay at 51.9.

(Edited by: Wang Zhiqiang HF013)

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