The energy shock from the Iran war is seeping ever deeper into the European economy, presenting policy-makers with a dilemma as it simultaneously weighs on growth and pushes prices higher, a broad set of data yesterday showed.
While most economists say this still cannot be compared to the outright “stagflation” mix of high inflation and stagnant growth that accompanied the energy shocks of the 1970s, it will exacerbate the cost of living crisis that followed the Covid-19 pandemic and which millions of households are still facing.
That in turn is complicating central bank decisions about interest rate moves and what kind of support the region’s governments offer to consumers facing higher fuel costs.
Activity in the euro zone shrank at its sharpest rate in over two-and-a-half years in May as a surge in living costs hammered demand in the dominant services sector and pushed input price inflation to its highest in three-and-a-half years, a closely followed S&P Global survey showed yesterday.
Separately, the European Commission downgraded its growth projections for the euro zone economy and acknowledged they could fall further if the disruption meant that energy prices only reached their peak by the end of this year. Outside the euro area, companies in Britain suffered their broadest drop in activity in over a year as the economic impact of the Iran war combined with political uncertainty at home.
S&P Global’s Flash Euro Zone Composite Purchasing Managers’ Index fell to 47.5 in May from 48.8 – its lowest since October 2023 – and below a Reuters poll forecast which predicted no change from April. The reading marked the second consecutive month of contraction across the bloc’s private sector. A PMI below 50.0 indicates slowing activity.
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