Business surveys show war-driven cost pressure is already hitting activity
Private sector growth in the euro zone nearly stalled in March, adding to signs that the war in the Middle East is already weighing on the region’s economy through higher energy costs, weaker confidence and worsening supply conditions. The latest business surveys suggest the bloc is not yet in recession, but it is moving into a more fragile phase with very little buffer left against further shocks.
The flash euro zone Composite Purchasing Managers’ Index fell to 50.5 from 51.9 in February, its lowest reading in 10 months. While that level still points to marginal expansion, the underlying message is more troubling. Output is slowing just as cost pressures accelerate, creating the kind of combination that makes policymakers especially uneasy because it weakens growth without offering any inflation relief.
The backdrop is a sharp rise in energy prices triggered by the conflict involving Iran. With oil up dramatically since the start of the year and a key transport corridor severely disrupted, households and companies across Europe are beginning to feel the strain. More expensive fuel reduces purchasing power, compresses margins and undermines sentiment at the same time, which is why economists are again raising concerns about stagflation.
Input prices and supply chains are deteriorating quickly
The most alarming part of the PMI report was not only the headline slowdown, but the speed of the shift inside the data. The manufacturing prices index jumped to 68.6 from 58.0, while the delivery times index dropped sharply to 40.9 from 47.3. Those moves point to a sudden surge in cost pressure and a clear worsening in supply chain conditions, the type of combination that can spread through production networks quickly.
That deterioration reflects more than a temporary reaction in commodity markets. Businesses are preparing for real delays, tighter availability and higher input bills, all of which increase the likelihood that the energy shock will move beyond fuel and into broader price formation. In a region where industry is already sensitive to energy costs, that is a particularly unwelcome development.
Several euro zone governments have already started to acknowledge the downside. Countries including Austria, Finland and Portugal have separately pointed to lower growth ahead, with more expensive energy among the reasons. The common thread is that Europe is once again confronting the reality that its economic model remains exposed when energy markets become unstable.
Consumers and exporters are feeling pressure at the same time
The growth slowdown is not being driven only by rising costs for producers. Households are also under pressure. Separate confidence data showed euro zone consumer sentiment falling to its weakest level since late 2023, with one of the largest drops on record. That decline suggests the energy shock is already feeding into public anxiety over living costs and future economic conditions.
This matters because the euro zone is entering this new phase from a position of only modest growth. Output across the bloc has been expanding at roughly 1 percent, according to many estimates, leaving little room to absorb a sharp external shock. If households pull back as fuel and utility bills rise, domestic demand could weaken at exactly the moment business costs are climbing.
The external side is not offering much relief either. Trade data released earlier had already shown that euro area exports were under pressure before the latest escalation in the Middle East. Shipments to the United States, China, the United Kingdom and Japan all fell, reflecting a combination of softer demand and disruption from trade uncertainty. That means the euro zone is facing weaker internal and external demand at once.
The ECB is being pushed into a more difficult position
The energy shock is also complicating the European Central Bank’s next move. Normally, central banks can try to look through energy-driven inflation if they expect it to fade. But that approach has become politically and financially harder after the inflation shock of 2021 and 2022, when central banks were widely criticized for reacting too slowly. Markets are therefore increasingly sensitive to any sign that higher energy prices might spill into core inflation and force a policy response.
The ECB has already warned that inflation could climb to at least 2.6 percent even under a relatively mild scenario. At the same time, rising market interest rates are beginning to filter into household borrowing costs, with some mortgage rates already moving higher. That creates a difficult feedback loop in which weaker growth and tighter financial conditions arrive together.
The euro zone is not yet in a full-blown crisis, but the latest data show how quickly its vulnerabilities can reappear. Growth is fading, costs are rising and confidence is slipping, all while the energy shock remains unresolved. For policymakers, the challenge is now clear. Europe is once again being tested by a problem it knows well: how to manage an external energy disruption when the economy is too weak to absorb it comfortably and inflation is too high to ignore.
