Eurozone PMI drops to ten-month low on Middle East conflict

Bert Colijn ING Economic and Financial Analysis

Eurozone's PMI for March has dropped to a 10-month low, from 51.9 in February to 50.5. The survey suggests that manufacturing has so far been less hit than services and that input prices are once again on the rise. The economic outlook has weakened significantly, but all now rests on how the conflict unfolds.

Ahead of the Middle East conflict, optimism among European businesses was strong. 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.

The bright spot was the manufacturing sector, where the output PMI remained broadly stable (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.

The eurozone’s vulnerabilities are once again laid bare. For energy-intensive industry, this means that a recovery will be harder to achieve, which matters significantly for overall production. And consumers are less confident with prices at the pump having jumped, which means that household consumption could be under pressure despite decent wage growth. The services PMI already reported a big decline, from 51.9 to 50.1.

For the eurozone economy, a return to strength depends very much on the length of the Middle East conflict. 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.

Read the original analysis here

Author

Bert Colijn

ING Economic and Financial Analysis

Bert Colijn is a Senior Eurozone Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the Eurozone.

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