What April’s PMIs are telling us: Growth in the Eurozone is stagnating and the energy shock is clouding the outlook further

The impacts of the US-Iran war are showing up across the world — but most of all in the Eurozone. Cost pressures are weighing on manufacturing and services segments the most, with factory activity dipping in all tracked indexes bar one, Bloomberg reports. Economists are now starting to talk about a potential recession hitting several economies, as well as a general stagflation trend, as central banks find themselves caught between stubborn inflation and a crumbling growth outlook.

The most affected countries: The euro area’s PMI is at its lowest since 2023, with manufacturing activity in France nosediving and the region’s biggest economy, Germany, economy set to contract in 2Q as its non-oil sector activity remains in contraction territory. Across the Eurozone and the US, a stock-building surge continues as firms try to get ahead of disruptions in the Strait of Hormuz.

It was a similar picture in Australia, which saw its PMI contract for the second month straight in April as factory activity stalled and services slumped.

In context: The Eurozone — as an energy importer — is particularly exposed to energy prices, with the European Commission now expecting the region’s growth to come in at 0.9%, down from 1.2% it forecast in November. Other economists expect a “technical recession,” Bloomberg says, as the specter of stagflation also hangs over the region.

REMEMBER- The PMIs also painted a negative picture for the Gulf, though not for exactly the same reasons. Business activity resumed in most countries, but a dent in demand and reduced client activity weighed on performance, along with a rise in costs, which were being passed on to consumers.

On the more resilient side: India and Japan both saw manufacturing activity continue to grow, though further energy squeezes are clouding the outlook for Japan.

The readings are making central banks’ jobs difficult. With the prospect of inflation ticking up to 4% in the next few months, “the growing signs of the region slipping into an economic downturn [is creating] a deepening dilemma for policymakers,” S&P Global Market Intelligence’s Chris Williamson said.

Interest rate hikes are looking likely, even if they come at the expense of economic growth and lead business activity to stagnate further or even contract. The likelihood of a cut triggered investors to offload government bonds, sending long-term yields to over 20-year highs.

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