Quick overview

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The sharp drop in the services sector dragged down overall activity across the European bloc. Demand weakened, while input prices recorded their largest increase in more than three years.

The war in the Middle East has already begun to take a toll on the economy of the European Union (EU), which recorded its weakest expansion in nine months. The data, covering the private sector in the Eurozone for March, pointed to a significantly weakened services sector, along with a decline in new orders and a sharp rise in input prices.

The Eurozone Composite PMI Output Index compiled by S&P Global fell to 50.7 last month from 51.9 in February, marking the slowest growth rate since June 2025. The reading remained above the 50 threshold that separates expansion from contraction, but came in well below the historical average of 52.4.

According to Chris Williamson, chief business economist at S&P Global, the figure “indicates that the eurozone economy has already been severely affected by the war in the Middle East.”

He added: “The encouraging signs of growth seen at the start of the year have faded due to soaring energy prices, supply chain disruptions, volatility in financial markets, and a renewed decline in demand.”

Williamson warned that “there are clear risks of economic contraction in the second quarter if the conflict is not resolved quickly. Even if it is, we are likely to see negative repercussions in the energy market that could last for several months.” He also said the situation “raises the unwanted specter of stagflation—or possibly something worse—in the short term.”

The S&P Global report noted that the services sector was primarily responsible for the slowdown in overall expansion in March, as activity levels barely increased during the latest survey period, registering a reading of 50.2. Meanwhile, manufacturing output growth remained solid.

Fewer orders and rising inflation

After a sustained period of improving demand, March saw a decline in total new orders across the eurozone, driven by a drop in orders received by services companies.

New export orders, which include trade within the eurozone, also declined in March, although the pace of contraction was moderate. By contrast, manufacturing export volumes nearly stabilized, highlighting a sharper slowdown in demand from foreign clients for services—the steepest in six months.

Employment losses also accelerated, reaching the fastest pace in thirteen months. This was mainly due to a sharper drop in manufacturing employment, although the decline remained marginal. The uptick in job losses coincided with weakening business expectations, as optimism fell in March for the first time since December 2025 amid a broad decline in confidence.

Input cost inflation also surged, reaching its highest level in just over three years. The manufacturing sector experienced a sharp rise in price pressures, with its purchasing price index jumping nearly eleven points from February—an unprecedented monthly increase.

Services companies also faced sharply rising costs, and March recorded the strongest overall increase in eurozone output prices for goods and services since February 2024.