The Eurozone economy is now on the brink of stagflation after private sector activity fell sharply to 50.5 in March. The drop in the Purchasing Managers' Index (PMI) shows that economic growth has almost come to a complete halt, driven by global energy supply disruptions due to the ongoing war in Iran.
Economists have warned that the surge in energy prices has caused business operating costs to rise at the fastest rate since mid-2022. Supply chain disruptions and maritime shipping delays have reduced company profit margins, forcing many firms to cut jobs and revise their output forecasts for 2026.
Stagflation is considered a “worst-case scenario” because it puts central banks in a dilemma. Raising interest rates to fight inflation could cripple already weak growth, while lowering interest rates risks fueling demand and rising prices for already high goods.
The latest data has also dented consumer confidence in Europe, which is now worried about rising living costs and energy security. European Commission President Ursula von der Leyen has called for urgent talks with Iran to end hostilities that are crippling global oil and gas supplies.
While the ECB had previously forecast growth of 0.9% for the year, analysts at J.P. Morgan think that figure may be too high. With business sentiment badly hit and energy prices uncertain, the Eurozone is likely to face a bleak economic phase through the first half of 2026.
