Europe’s economy is buckling under the weight of the war in Iran.
The latest purchasing managers’ index (PMI) survey or the earliest monthly read on Europe’s economy — showed eurozone business activity shrinking at its fastest pace since October 2023.
France collapsed into its sharpest contraction since the Covid lockdowns of November 2020.
Eurozone slowdown deepens
“May’s flash PMI survey data show the eurozone economy taking an increasingly severe toll from the war in the Middle East,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
He added that “output has now contracted for two successive months, with the rate of decline accelerating in May to its highest for just over two-and-a-half years.”
The S&P Global Flash Eurozone Composite PMI Output Index fell to 47.5 in May from 48.8 in April, marking a 31-month low and a second consecutive month below the 50.0 threshold that separates expansion from contraction.
The services sector, which accounts for the bulk of eurozone output, bore the brunt. The flash services PMI fell to 46.4 from 47.6, the worst reading since February 2021, and well below the consensus forecast of 47.7.
Williamson added that the service sector was “being hit especially hard by the surge in the cost of living created by the war,” notably through higher energy prices that are squeezing household spending power.
Manufacturing held up better at 51.4, but even there momentum is fading with new orders ticking down for the first time in months.
France recorded the sharpest decline
The most alarming numbers came out of France. The composite PMI plunged to 43.5 in May from 47.6 in April, far below the 47.7 expected by economists.
“May’s ‘flash’ PMI survey for France provides a dire set of numbers,” said Joe Hayes, principal economist at S&P Global Market Intelligence.
“The inflationary impact of the oil-price shock continues to proliferate, with price indices in both manufacturing and services moving higher once again,” he added.
The services activity index, which dominates the French economy, fell to 42.9 from 46.5, the lowest reading in 66 months.
Manufacturing output, which had offered a fleeting boost in April, reversed sharply with the output sub-index shedding more than six points to slip back into contraction.
Companies surveyed by S&P Global pointed directly to the cost of the war as the cause.
“The concern is that a broader uplift in the economy’s overall price level raises the risk of further demand destruction,” Hayes added.
“Alarmingly, we saw private sector new orders plummet in May, giving us a clear indication that this shock has materially lifted recession risks for the eurozone’s second-largest economy.”
French firms turned pessimistic about the year ahead for the first time since November 2024, and the degree of negativity was the greatest since the initial outbreak of the Covid-19 pandemic in April 2020.
Germany stalls, but contraction widens
Germany — the bloc’s industrial engine — was not spared.
The composite PMI ticked up marginally to 48.6 from 48.4, a two-month high but still firmly in contraction territory.
The manufacturing PMI fell to a four-month low of 49.9, with factory output growth nearly stalling and new orders dropping for the first time since December 2025.
Businesses are also beginning to cut jobs more aggressively.
German employment fell at the fastest rate in over a year and a half, led by deep cuts to manufacturing payrolls. Input cost inflation accelerated to a three-and-a-half-year high.
“The disruption from the effective closure of the Strait of Hormuz continues to filter through to prices, with input cost inflation showing a further acceleration due to the knock-on effects of higher energy prices and supply shortages,” said Phil Smith, Economics Associate Director at S&P Global Market Intelligence.
An inflation shock the ECB cannot ignore
The May PMI release was not just a growth story.
Input cost inflation across the eurozone accelerated for the seventh consecutive month, hitting a three-and-a-half-year high. Prices charged for goods and services rose at the fastest pace in 38 months.
In France, output price inflation reached a three-year peak. In Germany, the manufacturing input price index has surged toward levels last seen during the 2022 energy crisis.
The European Central Bank now faces what Williamson described as “a deepening dilemma for policymakers”.
Money markets are pricing in more than an 80% probability of a 25-basis-point rate hike at the next ECB meeting, with two further increases anticipated by year-end — even as the growth data deteriorates sharply.
The price of the Hormuz disruption
Two months ago, Europe was still expanding. Today, its economic activity is flashing the loudest recession signals in years.
The closure of the Strait of Hormuz is no longer just a geopolitical headline — it is showing up directly in the eurozone real economy, and the ECB is running out of time to decide which side of the dilemma to defend.
