Middle East Conflict Triggers Economic Slowdown Across Europe

European economic growth has dropped to near-stagnation levels as ongoing Middle East conflicts drive up costs and disrupt supply chains. A new survey reveals the region's private sector expansion hit a 10-month low in March, with businesses facing the highest input costs in over three years.

LONDON, March 24 – European economic activity has slowed dramatically this month as ongoing Middle East conflicts have pushed business costs to their highest levels in more than three years while creating the most severe supply chain problems since mid-2022, according to new survey data released Tuesday.

The S&P Global flash euro zone Composite Purchasing Managers’ Index dropped to 50.5 in March, down from February’s reading of 51.9. This represents the lowest level in 10 months and falls short of economists’ predictions of a smaller decline to 51.0.

The index has remained above the critical 50.0 threshold that indicates expansion rather than contraction for 15 consecutive months.

Economic momentum ground to a halt as new business orders declined for the first time in eight months, primarily due to weakness in service industries. While manufacturing orders continued growing, production output in that sector edged down to 51.7 from the prior month’s 51.9.

“The flash euro zone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Business expenses increased at their steepest rate since February 2023, affecting both manufacturing and service companies with accelerating price pressures. The cost surge was particularly severe in manufacturing as energy prices climbed and supply networks became severely constrained due to the ongoing conflict.

Delivery delays from manufacturing suppliers extended significantly, reaching their worst levels since August 2022, primarily because of shipping interruptions related to the war.

Production levels kept rising in Germany, boosted by manufacturing output that expanded at its fastest pace in over four years, while France experienced another decline. Other eurozone nations showed only minimal activity increases, representing the weakest performance in 27 months.

Workforce levels dropped for the third month running, with job reductions concentrated in manufacturing where employment has fallen every month since June 2023. Service sector hiring increased slightly but at the smallest rate since September.

Business optimism crashed to nearly a year-low, with the monthly decline representing the steepest drop since Russia’s Ukraine invasion in early 2022. Companies maintained positive outlooks for the coming year but sentiment remained below historical averages.

“Output growth has meanwhile slowed to near-stagnation thanks to a slump in business confidence and deterioration of new orders,” Williamson added.

The survey findings suggest eurozone gross domestic product growth decelerated to a quarterly rate just under 0.1% in March, with forward-looking measures indicating increased recession risks in upcoming months.