Growth nearly stalled in March: S&P's flash euro-zone composite PMI slipped to 50.5. That reading and rising price gauges come as the IMF cut the bloc's 2026 growth outlook to 1.1% from 1.4%, blaming disruptions to energy routes and higher oil and gas costs linked to the Middle East conflict. Firms report longer delivery times, soaring input prices and plunging household confidence, while banks expect the ECB to lean on rates if price pressures persist.

Supply shock, higher input costs

  • S&P Global’s flash euro-zone composite PMI fell to 50.5 in March from 51.9 in February, the weakest reading in ten months, driven largely by a spike in input costs and worsening supply delays.
  • The manufacturing prices sub-index rose and delivery-times measures deteriorated, indicating firms expect further delays and cost increases.
  • Chris Williamson, chief business economist at S&P Global Market Intelligence, warned the polling pointed to stagflation risks as the Middle East war pushes prices up while growth stalls.
  • Oil prices have risen this year as shipping lanes were disrupted and attacks damaged infrastructure, raising energy costs across Europe and squeezing household purchasing power and corporate margins.

Trade, exports and national divergences

  • External demand weakened at the start of 2026, with exports to major partners down year-on-year in January, compounding domestic pressure from higher energy bills.
  • Not all euro-area economies are reacting the same: Germany’s activity held up relatively better in the PMI data, while France and several smaller economies showed sharper declines in confidence.
  • Countries including Austria, Finland and Portugal have trimmed growth expectations, citing higher energy costs among the reasons.
  • Petrol prices across the EU have risen and consumer confidence fell to its lowest level since late 2023, reflecting how quickly households feel the shock from higher pump prices and bills.

IMF downgrades outlook and models energy pain

  • The IMF lowered its 2026 growth forecast for the euro area to 1.1% from 1.4%, attributing the downgrade to disruptions in energy markets stemming from the Middle East conflict.
  • Pierre-Olivier Gourinchas, chief economist at the IMF, said the crisis has set back recent global progress and left advanced economies more exposed to energy-price swings.
  • The IMF’s World Economic Outlook models scenarios with notably higher energy costs for Europe, which would hit industrial output and keep inflation elevated.
  • Lindsay James, an investment strategist at Quilter, said the shock could be short-lived if the conflict ends quickly but that a prolonged disruption would raise the risk of recession.

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The IMF cut the euro zone's 2026 GDP forecast to 1.1% from 1.4%, citing energy-market disruption tied to the Middle East conflict.

This article was created with AI assistance.