Stagflation Alert Triggered! Eurozone March Composite PMI Falls to 10-Month Low, France PMI Contracts for Three Consecutive Months

Middle East war pushes up energy costs and suppresses the service sector, leaving the European Central Bank facing a dilemma between growth and inflation.

Private sector activity in the Eurozone sharply slowed in March, with the composite PMI falling to a 10-month low, triggering a warning of stagflation risk. The unexpected rebound in manufacturing failed to offset the broad softening in services, while soaring energy prices and supply chain pressures caused by the Middle East conflict are fundamentally reshaping Europe’s economic outlook.

According to preliminary data released by S&P Global on Tuesday, the Eurozone March composite PMI fell from 51.9 in February to 50.5, below analysts’ forecast of 51, marking the lowest level since May last year, but still barely holding above the 50 expansion/contraction threshold. The services PMI preliminary reading dropped to 50.1, well below the expected 51.1; meanwhile, manufacturing PMI unexpectedly rose to 51.4, a 45-month high, beating the forecast of 49.6.

Germany and France simultaneously cool down. Germany’s composite PMI unexpectedly declined to 51.9, with manufacturing surprisingly strengthening partly due to clients stockpiling in advance to avoid supply chain risks from the war. France’s composite PMI fell more than expected to 48.3, a five-month low, remaining below the growth threshold for three consecutive months.

Following the data release, financial markets reacted relatively calmly. The yield on 10-year German government bonds remained stable at around 3%; the euro slightly declined by 0.2%, trading at 1.1593 USD. The currency market continues to price in tightening bets, with about 70 basis points of rate hikes expected by year-end.

Stagflation warning: rising costs and slowing growth coexist

Chris Williamson, Chief Business Economist at S&P Global, stated plainly, “The March Eurozone PMI flash signals a stagflation warning—Middle East conflict is significantly pushing up prices while constraining growth.” He pointed out that with energy prices soaring and the war disrupting supply chains, business costs are rising at the fastest pace in over three years.

According to S&P Global, input prices accelerated at the fastest rate since February 2023, with surveyed companies citing widespread increases in energy, fuel, transportation, wages, and raw materials; supply chain pressures are also mounting, with disruptions in shipping and delays in Asian imports becoming evident.

Firms’ future output expectations have seen the largest decline since the Russia-Ukraine conflict erupted, reflecting deep market pessimism about the outlook.

Williamson said the current situation “will force the ECB to adopt a cautious policy stance in the face of increasingly clear and rising stagflation risks over the coming months.”

Germany and France cool down together, services sector dragging

Further disaggregation of the Eurozone’s major economies reveals internal divergence.

Germany’s composite PMI fell from 53.2 to 51.9, exceeding expectations (52.2), but still in expansion territory. Manufacturing unexpectedly strengthened, partly due to clients stockpiling to hedge against supply chain risks from the war; however, the services PMI only registered 51.2, significantly below market expectations.

S&P Global economist Phil Smith warned, “Manufacturing output expectations have been downgraded, which suggests the surge in factory activity is likely to be short-lived.” Germany had been on the cusp of an economic turning point due to fiscal spending, but external shocks are once again hampering the recovery momentum.

France’s situation is even more severe. The March composite PMI fell further from 49.3 to 48.3, a five-month low, remaining below the growth threshold for the third consecutive month, also below the Bloomberg consensus forecast of 49.3. The services PMI dropped to 48.3, and although manufacturing remains in expansion, its support for the overall outlook is limited.

S&P Global Chief Economist Joe Hayes commented, “For now, France’s nascent recovery appears to have hit a pause.” He noted that rising inflation threats, long-term supply disruptions, and recent uncertainties are prompting firms to reassess their outlooks, with business confidence declining sharply.

ECB faces a dilemma with limited policy space

The ECB is currently in a wait-and-see mode, needing to address inflationary pressures stemming from the Middle East situation while also weighing the uncertainty of potential policy shifts by the U.S. (e.g., Trump’s stance). According to Bloomberg, citing sources, officials do not rule out a rate hike at the April policy meeting.

Chris Williamson believes that, given the “clear and rising stagflation risks over the coming months,” the ECB “will have to adopt a cautious approach” in policy.

He pointed out that PMI data indicate the ECB is no longer in a “favorable position” regarding growth and inflation—slowing growth combined with accelerating costs greatly narrows the room for maneuver in monetary policy. The duration of the Middle East conflict and its potential long-term impacts on energy and supply chains will be key variables in determining the Eurozone’s economic outlook.

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