The euro zone's private sector expansion weakened sharply in March as the Middle East war drove up energy costs and disrupted supply chains, with overall demand - a key gauge for economic health - falling for the first time in eight months, a survey showed on Tuesday.
The S&P Global euro zone Composite Purchasing Managers' Index fell to 50.7 in March from 51.9 in February, but was slightly higher than a preliminary estimate of 50.5. PMI readings above 50.0 indicate growth in activity, according to Reuters.
“March's PMI indicates that the euro zone economy has already been hit hard by the war in the Middle East,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
New business declined in March after improving steadily since July, dragged down by weaker demand for services. Overall export orders also fell again, with international services demand recording its steepest drop in six months.
The encouraging signs of growth seen earlier in the year have been eradicated thanks to surging energy prices, choked supply chains, financial market volatility and a renewed downturn in demand, Williamson added.
Services activity barely rose, with the business activity index sliding to 50.2 from 51.9 in February - its weakest reading in 10 months.
Manufacturing output growth remained solid.
Spain led the growth among the major economies, while France and Italy contracted. Germany's expansion slowed to its weakest pace so far this year.
Employment declined while business confidence dropped, raising concerns about future hiring and investment.
Input cost inflation surged to its highest in slightly more than three years, with manufacturing seeing a record one-month jump. Firms raised prices charged to customers at the fastest pace since February 2024, though the increase was more modest than the spike in their own costs.
Headline inflation in the bloc jumped above the European Central Bank’s 2% target last month, hitting 2.5% from 1.9% as soaring oil and gas prices intensified the dilemma between safeguarding growth and curbing inflation.
The survey's signal for first-quarter gross domestic product growth was 0.2%, with a risk of contraction this quarter unless the Middle East conflict is resolved swiftly.
German service sector growth slows
Meanwhile, business activity growth in Germany's service sector abruptly lost momentum in March as demand weakened amid fallout from the war in the Middle East, the survey also showed on Tuesday.
PMI for Germany fell to 50.9 in March from 53.5 in February, marking its lowest reading since September and slightly below a preliminary reading of 51.2.
Phil Smith, economics associate director at S&P Global Market Intelligence, cited higher prices at the petrol pumps and heightened uncertainty as leading to the slowdown.
Despite the sharply rising costs, however, service providers have not been able to pass on greater price increases to customers due to the weaker demand environment, he added.
“Inflows of new business have fallen for the first time since last September in a clear sign of the Middle East war's immediate impact on demand, whilst a notable drop in business expectations underlines how higher energy prices, supply chain disruption and generally elevated levels of uncertainty are set to stifle growth in the year ahead,” said Smith.
Business expectations dropped to a three-month low in March, to 53.4, and slipped below the long-run average of 56.7.
The final S&P Global composite PMI, which includes manufacturing and services, ticked down to 51.9 in March from 53.2 the previous month, a three-month low driven entirely by the downturn in the service sector.
France's services sector contracts
Also, France's services sector contracted further in March as client spending weakened due to the war in the Middle East and caution among businesses in the run-up to last month's local elections, a business survey showed on Tuesday.
S&P Global said the final services PMI for March fell to 48.8 points from 49.6 points in February, marking a slight improvement from the flash March services figure of 48.3 points.
The final March composite PMI - which includes both the services and manufacturing sectors - also came in at 48.8, down from 49.9 in February. S&P Global said this marked the quickest drop in private sector business activity since October.
S&P Global added that the US-Israeli war on Iran was impacting French businesses both in terms of inflation and customers postponing orders or delaying investments.
“Much uncertainty lies ahead, a condition which French businesses have become rather accustomed to in recent years given the domestic political environment. Uncertainty is bad for growth, and the inflation impulse stemming from the war raises the risk of stagflation in France,” said Joe Hayes, principal economist at S&P Global Market Intelligence.
