Eurozone Business Activity Hits 2.5-Year Low

(MENAFN) Economic activity across the eurozone contracted in May at the sharpest rate in two and a half years, as the ongoing conflict in Iran and surging energy costs hammered demand and fanned the flames of inflation, closely watched survey data showed.

The HCOB Flash Eurozone Composite PMI Output Index, compiled by S&P Global, slid to 47.5 in May from 48.8 in April — its second consecutive month below the critical 50-point boundary dividing expansion from contraction, and weaker than analyst forecasts that had anticipated no change.

The deterioration was led by a pronounced slump in services activity, while manufacturing managed to stay marginally in growth territory, buoyed in part by firms building up precautionary inventories — a buffer that analysts cautioned may be short-lived.

Within the bloc's two dominant economies, Germany's composite reading held broadly steady, whereas France suffered a steeper slide, with its gauge tumbling to its lowest level since 2020.

Price pressures compounded the gloomy picture. Input costs and output prices across both goods and services climbed at their fastest clip in more than three years, signaling that inflationary forces are reasserting themselves with renewed vigor.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the acceleration in survey price gauges already pointed to inflation running close to 4% in the months ahead. He cautioned that this trajectory, set against mounting evidence of an economic downturn, was deepening the policy dilemma facing eurozone authorities — caught between the need to contain inflation and the risk of choking off a fragile recovery.

Williamson further noted that the services sector was absorbing particularly acute pain from the war-driven surge in living costs, while the manufacturing sector's temporary lift from inventory accumulation was showing clear signs of fading. He also flagged increasingly widespread supply-chain disruptions as an additional threat — one capable of both suppressing growth and adding fresh upward pressure to prices in the near term.

The European Central Bank is scheduled to revisit its economic projections at its June 10–11 policy meeting, with financial markets closely scrutinizing whether officials will move to raise interest rates in response to the renewed inflationary surge. In March, ECB staff had penciled in eurozone GDP growth of 0.9% for 2026 and 1.3% for 2027 — though policymakers have since acknowledged that the region is navigating a path somewhere between that baseline and a more damaging scenario tied to a protracted conflict.

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