Eurozone economy falters as US-Iran war drags on

(Sharecast News) - The Eurozone downturn deepened in May, a closely-watched survey showed on Thursday, as the war in the Middle East ramped up inflationary pressures.

The latest flash S&P Global Eurozone PMI composite output index was 47.5, down on April's 48.8 and a 31-month low. It was also below forecasts for no change. A reading above the neutral 50.0 benchmark suggest growth while one below indicates contraction.

Both the services and manufacturing sectors showed weakness, though the former was particularly badly hit, with the PMI business activity index sliding to a 63-month low of 46.4 from April's 47.6. Consensus had been for 47.7.

The manufacturing PMI remained in positive territory, although that weakened to 51.4 from 52.2.

The surveys showed falls in output, new orders, employment and business confidence, while input prices increased at the fastest pace in more than three years. Selling price inflation was also higher.

Among individual countries, in Germany - Europe's largest economy - the composite PMI nudged up to 48.6 from 48.4. But in France it tumbled to 43.5 from 47.6.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "May's data show the Eurozone economy taking an increasingly severe toll from the war in the Middle East. Output has now contracted for two successive months, with the rate of decline accelerating to its highest for just over two and a half years.

"Job losses are also starting to become worryingly widespread, as business confidence in any swift turnaround in the adverse economic climate fades further."

The US first attacked Iran at the end of February, leading to the outbreak of hostilities across the Gulf and the effective closure of the vital Strait of Hormuz. Global energy prices have soared, reigniting inflationary fears, and supply chains are becoming increasingly disrupted.

A fragile ceasefire is currently in place but a permanent peace deal remains elusive.

Bert Colijn, chief economist, Netherlands, at ING, said: "While the markets' focus is still mainly on the inflationary impact of the Middle East war, today's Eurozone PMI confirms that the growth impact is not to be overlooked.

"Businesses are suffering from sharp input cost increases, combined with uncertainty and low confidence among corporates and consumers. This results in declining new orders in both services and manufacturing for the moment.

"But because demand is weakening, it looks like businesses are going to struggle more to pass on their higher input costs to the consumer."