LONDON, March 24 (Reuters) - Euro zone private sector growth slowed sharply in March as the Middle East war drove input costs to their highest in more than three years and triggered the worst supply
Euro zone economy close to stalling as war takes its toll
Impact of War and Inflation on the Euro Zone Economy
By Jonathan Cable and Balazs Koranyi
LONDON/FRANKFURT, March 24 (Reuters) - Euro zone private sector growth nearly stalled this month as inflation expectations surged and delivery times soared, adding to mounting evidence that the bloc is already suffering a tangible drag from the U.S. and Israeli war with Iran.
With oil prices up by two-thirds since the start of the year as a key transport corridor is shut, euro zone inflation is already rising and economic growth is taking a hit. Expensive fuel saps household purchasing power, lowers corporate profit margins and hits confidence.
Economic Indicators and Market Reaction
The S&P Global flash euro zone Composite Purchasing Managers' Index fell to a 10-month low of 50.5 in March from 51.9 in February, as the war drove input costs to their highest in more than three years and triggered the worst supply chain disruptions since mid-2022.
Underlying figures saw much bigger changes. The index for manufacturing prices jumped to 68.6 from 58.0 while the delivery times index plunged to 40.9 from 47.3, suggesting that firms anticipate massive delays and a surge in prices.
National Economic Outlooks
A host of euro zone nations, including Austria, Finland and Portugal, all separately predicted lower economic growth ahead, partly because of dearer energy.
This is still not expected to push the bloc into recession but growth is already at only around 1%, indicating there is little buffer left, economists say.
Stagflation Concerns
"The flash euro zone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth," Chris Williamson, chief business economist at S&P Global Market Intelligence, said.
German figures held up relatively well, with other major economies taking a bigger hit, including France, where business confidence tumbled.
Consumer Confidence and Trade Data
Separate data a day earlier showed consumer confidence in the bloc falling to its lowest level since late 2023 in one of the biggest falls on record, tumbling deep below its long-term average as the economic pain takes its toll on households.
Even before the war, according to trade data released last week, European exports fell sharply at the start of 2026, buffeted by U.S. President Donald Trump's erratic tariff announcements. EU exports to the United States fell 27.8% year-on-year in January, with a 4.7% drop in exports to China, and falls of 1.5% and 10.2% to the UK and Japan respectively.
Rates Rise, Disposable Income Hit
"The survey points to a large near-term inflation impact from higher energy that could feed into core prices," JP Morgan's Raphael Brun-Aguerre said. "The energy price shock could hit business profitability and has already damaged demand conditions and output more broadly in the region."
Interest rates are rising as banks anticipate hikes from the European Central Bank to curb inflation, and this has already pushed some mortgage rates higher to dent disposable incomes.
Energy Prices and ECB Response
Meanwhile petrol prices have risen by more than 10% across the EU and diesel is up over 20%. Even if the war ends relatively soon, these prices are unlikely to fall quickly as some energy infrastructure is damaged and fuel bottlenecks may take several months to resolve.
This is why the ECB already said that inflation, at its 2% target for the past year, will surge to at least 2.6% under its more benign scenario. Risks are skewed to much higher readings.
Long-Term Economic Vulnerabilities
"The euro zone's vulnerabilities are once again laid bare," ING economist Bert Colijn said. "For energy-intensive industry, this means that a recovery will be harder to achieve, which matters significantly for overall production."
Central banks normally look past such energy-driven inflation shocks but markets are betting on quick rate hikes this time, not least because a similar shock in 2021/22 proved to be lasting and central banks reacted late.
(Reporting by Balazs KoranyiEditing by Peter Graff)
