Workers of German steel manufacturer Salzgitter AG stand in front of a furnace at a plant in Salzgitter, Germany, March 1, 2018.
Fabian Bimmer | Reuters
Private sector output in the euro zone sank to a 10-month low in March, amid mounting evidence of the impact the Iran conflict is having on the global economy.
The closely-watched S&P Global flash purchasing managers’ index (PMI) for the euro zone fell to 50.5 in March, marking a steep decline from the 51.9 reported in February.
Economists polled by Reuters had expected a shallower dip to 51.0. The 50.0 threshold separates expansion from contraction territory.
The reading prompted fresh warnings that the region is facing the specter of looming stagflation — a toxic combination of high inflation and unemployment, and stalling growth.
“The flash Eurozone 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, commented Tuesday.
“Firms’ costs are rising at the fastest rate for over three years amid the surge in energy prices and choking of supply chains resulting from the war. Supplier delays have jumped to their highest since mid-2022, largely linked to shipping issues.”
Euro zone companies surveyed by S&P Global scaled back hiring marginally during March, as bosses lowered output expectations for the year when compared with February forecasts, S&P Global economists.
“Stagflation” is often seen as a “worse case scenario” for economies and poses a dilemma for central banks because the tools they’d usually use to combat high inflation — higher interest rates — can stifle growth and employment, while lowering rates can boost growth but increase demand and inflation.
The euro zone is not alone in seeing private sector activity slow due to the Iran war with PMI data from India earlier on Tuesday also showing output growth slowed to its lowest level since October 2022.
‘Critical’ energy crunch
The current turmoil in the Middle East has made previous growth and inflation forecasts largely redundant, and businesses and policymakers have been left trying to gauge the direction of travel for input costs and inflation without knowing how long the conflict will last.
In revised forecasts released last week, the European Central Bank now expects economic growth of 0.9% in 2026, and headline inflation to average 2.6% this year.
That outlook could be optimistic, however, with S&P Global’s Williamson noting that the PMI survey’s price gauge was indicative of inflation accelerating close to 3%, “with cost pressure likely to add still further to selling price inflation in the coming months.”
“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,” Williamson said.
The March PMIs show the conflict in Iran is already having a significant impact on the euro area economy, JPMorgan’s Raphael Brun-Aguerre noted Tuesday.
“Overall, the survey points to a large near-term inflation impact from higher energy that could feed into core prices … The energy price shock could hit business profitability and has already damaged demand conditions and output more broadly in the region. Business sentiment is being hit significantly. European Commission data [out Monday] already showed a large hit to consumer confidence in March,” he noted in emailed analysis.
A tanker carrying Iraqi fuel oil that was damaged in unidentified attacks targeting two foreign tankers, according to Iraqi port officials, near Basra, Iraq, March 12, 2026.
Mohammed Aty | Reuters
Early Tuesday, European Commission President Ursula von der Leyen said it was time for negotiations with Iran, given the “critical” nature of the global energy crisis.
“The situation is critical for the energy supply allies worldwide. We all feel the knock-on effects on gas and oil prices, our businesses and our societies, but it is of utmost importance that we come to a solution that is negotiated, and this puts an end to the hostilities that we see in the Middle East.”