Economic activity across the eurozone weakened sharply in May as rising energy prices and geopolitical tensions linked to the Iran conflict pushed the region closer toward recession risks.
According to the latest Purchasing Managers’ Index (PMI) survey released by S&P Global Market Intelligence, business activity in the eurozone fell to its lowest level in more than two and a half years, highlighting the increasing economic pressure caused by disruptions in the Middle East.
The S&P Global Flash Eurozone Composite PMI Output Index declined to 47.5 in May from 48.8 in April, remaining below the critical 50-point threshold that separates growth from contraction. The latest figure marks the second consecutive month of economic decline and the weakest reading since October 2023.
Economists warned that the ongoing war in Iran and the disruption surrounding the Strait of Hormuz are significantly affecting Europe’s economy through soaring energy costs, inflationary pressures, and weakening consumer demand.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated that the eurozone economy is “taking an increasingly severe toll” from the Middle East conflict, particularly within the services sector, which accounts for the majority of the region’s economic output.
The eurozone services PMI dropped sharply to 46.4 in May from 47.6 in April, recording its weakest performance since February 2021 and falling below market expectations.
France recorded the most alarming downturn among major European economies. The country’s composite PMI plunged to 43.5 in May from 47.6 the previous month, marking the sharpest contraction since the COVID-19 lockdown period in late 2020.
France’s services activity index, which dominates the national economy, dropped to a 66-month low, while manufacturing output also returned to contraction territory after a brief recovery in April.
Joe Hayes, Principal Economist at S&P Global Market Intelligence, described France’s latest PMI data as “dire,” noting that rising oil prices and inflation are intensifying recession concerns for the eurozone’s second-largest economy.
Germany, Europe’s largest economy, also remained under pressure. Although its composite PMI slightly improved to 48.6, the country stayed firmly in contraction territory as manufacturing orders weakened and businesses accelerated job cuts.
German companies additionally reported a sharp increase in input costs due to higher energy prices and supply shortages connected to disruptions in the Strait of Hormuz.
Inflationary pressures across the eurozone have continued to intensify. Input cost inflation rose for the seventh consecutive month, reaching its highest level in three and a half years. Prices charged for goods and services also climbed at the fastest pace seen in nearly four years.
The worsening economic data has created a difficult challenge for the European Central Bank, which must now balance rising inflation against slowing economic growth.
Financial markets are currently pricing in a strong possibility of additional ECB interest rate hikes later this year despite mounting recession fears across the eurozone.
Analysts say the ongoing geopolitical instability in the Middle East has transformed from a regional security issue into a major economic threat for Europe, directly impacting energy markets, inflation, trade activity, and overall business confidence.
