Eurozone March PMI slows amid price pressures…stagflation alarm bells

Economic activity slows, input costs post biggest rise in three years

ECB Governing Council member: “Beware the risk of slipping into stagflation”

As inflation pressures mount due to the war between the United States and Iran, the eurozone’s private-sector economic activity slowed in March to its weakest pace in 10 months, according to data. By contrast, rising transport costs and higher raw-material prices pushed input prices up at the fastest rate in three years, reigniting inflation pressures.

On the 24th (local time), S&P Global said the eurozone’s composite Purchasing Managers’ Index (PMI) came in at 50.5 in March, down from 51.9 in February. The reading was weaker than economists’ forecast of 51.

The 50 mark is the baseline separating contraction from expansion; a reading above 50 is interpreted as expansion. The data were collected between March 12 and 20, after the war began.

Germany, the eurozone’s largest economy, also saw its composite index fall more than expected. France slipped below the 50 threshold for a third consecutive month.

In the eurozone PMI, expectations for future output fell by the most since four years ago, when Russia’s invasion of Ukraine began. Input prices rose at the fastest pace since February 2023, indicating stronger inflation pressures.

The UK’s March PMI released the same day also showed that input costs across the private sector rose by the largest margin in three years, helped by higher prices for fuel, transport and energy-intensive raw materials, pointing to an acceleration in war-driven inflation pressures.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said, “With prices rising sharply amid the Middle East war while growth is being constrained, the flash eurozone PMI has sounded stagflation alarm bells.” He added, “Against a backdrop of surging energy prices and war-related supply-chain disruptions, companies’ costs are rising at the fastest pace in three years.”

Williamson said, “It will depend on the duration of the war and its longer-term impact on energy and supply chains, but the latest flash PMI data clearly show that the European Central Bank (ECB) is not in a ‘good place’ on either growth or inflation.” He added, “With stagflation risks clearly increasing over the coming months, the ECB should proceed cautiously in policy.”

The conflict in the Middle East is already threatening the eurozone’s meagre economic growth, and markets expect rate hikes may be needed to contain a renewed upswing in inflation. Investor sentiment is deteriorating rapidly as signs emerge of potential long-term damage to oil and natural-gas infrastructure.

The ECB has maintained a wait-and-see stance, mindful that President Trump could reverse course without warning. However, ECB officials did not rule out the possibility of moving to raise rates at the next policy meeting in April.

Boris Vujcic, a member of the ECB’s Governing Council, said in an interview, “Stagflation has not occurred at this point, but the risk of sliding into stagflation is increasing,” adding that vigilance is needed.

After the release, the euro fell 0.2% to $1.1593, extending its decline. In short-term money markets, expectations for monetary tightening are rising, with roughly 70bp of rate hikes priced in by year-end.

Kim Jeong-a, contributing reporter kja@hankyung.com