Euro-Zone Business Activity Shrinks at Fastest Since 2023

da5zcbb{k{laqw93xujdn}[m_media_dl_1.png Bloomberg, S&P

Article content

(Bloomberg) — Business activity in the euro area shrank at the quickest pace in 2 1/2 years, adding to fears that the Iran war and accompanying surge in energy costs are dealing a severe blow to the economy.

Article content

The Composite Purchasing Managers’ Index compiled by S&P Global fell to 47.5 in May from 48.8 in April, holding below the 50 threshold separating growth from contraction for a second month. Analysts in a Bloomberg survey had anticipated an unchanged reading.

Article content

Article content

Article content

Once again, manufacturing grew thanks to precautionary stock-building, while the services sector slumped. Among the region’s top two economies, Germany’s composite reading was more or less stable, while France’s plunged to the lowest level since 2020.

Article content

Article content

Price pressures, meanwhile, continued to build with input costs and goods and services prices both surging at the fastest rate in more than three years.

Article content

“The rise in the survey’s price gauges already hints at inflation running close to 4% in the coming months,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said Thursday in a statement. That, “combined with the growing signs of the region slipping into an economic downturn, creates a deepening dilemma for policymakers.”

Article content

Europe’s economy is weakening in the face of the faster inflation and sagging sentiment caused by the conflict in the Middle East. There could be further headwinds for the 21-nation bloc as the European Central Bank mulls raising interest rates to counter upward price pressure, with markets betting on a quarter-point increase for June.

Article content

Article content

Speaking this week to Bloomberg Television, Belgian central-bank Governor Pierre Wunsch said “the likelihood of a hike is quite high” if the war doesn’t end soon.

Article content

What Bloomberg Economics Says…

Article content

“The composite PMI survey for the euro area revealed another unexpected, sharp slowdown in activity. It highlights the dilemma that the energy shock has created for the ECB with the economy weakening markedly as inflation climbs. While we expect the ECB to raise rates in June, the aggressive monetary tightening being priced in by financial markets appears is unlikely to materialize.”

Article content

—David Powell. Senior euro-area economist. Click here for full REACT

Article content

There’s also an acknowledgment, however, that economic expansion is under threat. Vice President Luis de Guindos, who retires this month, has urged prudence on rates, arguing that the growth impact “is going to become much more visible over the coming weeks.”

Article content

In March, ECB economists predicted gross domestic product would rise 0.9% in 2026 and 1.3% in 2027, though officials have since said the euro area is somewhere between that outcome and an adverse scenario assuming a longer war that brings more meager expansion. It will update its forecasts at the June 10-11 meeting.