Performance of Eurozone PMI depends on how Iran conflict unfolds, says ING

The economic outlook for the Eurozone Purchasing Managers’ Index (PMI) depends on how the Iran conflict unfolds, Bert Colijn, chief economist with ING in the Netherlands, has said.

Colijn was commenting as the Eurozone PMI fell to 50.5, marking its lowest level in ten months. This represents a significant decline from February’s reading of 51.9.

Diminished optimism

“Ahead of the Middle East conflict, optimism among European businesses was strong,” Colijn commented. “Growth was maintaining a decent pace over previous quarters, and expectations of increased public investment were boosting hopes of a rebound among manufacturers.

“But the war has put paid to hopes of short-term growth acceleration. Businesses were much less optimistic in March, according to the Purchasing Managers’ Index, and reported significant increases in input costs and supply chain disruptions.”

Manufacturing output remained relatively resilient, with a PMI of 51.7, compared to 51.9 in February.

“This still indicates decent output growth for now, but the mood among manufacturers for the months ahead has become more downbeat,” said Colijn.

Businesses have reported disruptions to supply chains and increases in the costs of raw materials and energy, primarily driven by the ongoing conflict in the Middle East.

The services sector, which is more sensitive to consumer confidence and discretionary spending, saw its PMI decline to 50.1. This suggests that households are beginning to moderate spending, influenced by rising prices at the pump and the economic uncertainty created by the conflict.

“For the eurozone economy, a return to strength depends very much on the length of the Middle East conflict,” Colijn added. “A fairly fast end would boost hopes of a more modest impact on consumer prices and would increase chances of a rebound for industry. But as today’s PMI illustrates, business conditions have worsened for the moment, and optimism is taking a hit.”

‘Stagflation alarm bells’

Elsewhere, Chris Williamson, chief business economist at S&P Global Market Intelligence said that the latest Eurozone PMI is “ringing stagflation alarm bells”.

He added that the outlook depends on the “duration of the war and any potential lasting impact on energy and supply chains, but the flash PMI data underscore how the European Central Bank is no longer in a ‘good place’ with respect to growth and inflation, and will have to tread a cautious path with respect to policy in the face of a clear and rising risk of stagflation in the coming months.” Read more here and here.