Euro Area Business Activity Shrinks First Time Since Late 2024 Amid Iran War
Euro area business activity unexpectedly contracted in April for the first time since late 2024, with the S&P Global Composite PMI falling to 48.6. This decline, primarily due to the services sector and the Iran war, signals deepening economic challenges and rising price pressures. The European Central Bank faces a dilemma as inflation exceeds its 2% target, while markets anticipate two rate hikes by year-end.
Business activity in the euro area unexpectedly contracted in April for the first time since late 2024, driven by a steep decline in the services sector. The S&P Global Composite Purchasing Managers’ Index fell to 48.6 from 50.7 in March, dropping below the 50-point threshold that separates growth from contraction. Analysts had forecast a dip to 50.1.
This trend was mirrored in Germany, where services plummeted despite industry holding steady. In France, manufacturing exceeded expectations with its strongest performance since 2022, even as services declined. Price pressures continued to intensify across the region. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated that the euro zone faces deepening economic challenges from the Middle East war, creating a significant concern for policymakers. He warned that widespread supply shortages threaten to further dampen growth and increase price pressures.
The unexpected weakness raises concerns for the European Central Bank, which is anticipated to maintain current interest rates this month. While inflation has surpassed the 2% target, policymakers are awaiting more data on the persistence of price increases. Markets are pricing in two rate hikes by year-end. Higher energy costs, a key driver of inflation, are also impacting output, which was expected to gain momentum before the conflict. Government spending, particularly Germany's hundreds of billions of euros in defense and infrastructure, is expected to mitigate the impact. Some governments are also providing assistance as gasoline prices surge.
Williamson noted that business sentiment has fallen to its lowest since late 2022, with consumer confidence also suffering. He cautioned that manufacturing growth is partly driven by companies building stock to pre-empt further price hikes or supply shortages. Input costs and selling prices have surged due to higher energy and broader commodity prices, alongside a mismatch between demand and constrained supply. Excluding the Covid-19 pandemic, this represents the largest surge in cost pressures since 2000.