Stagnation alarm rings again! Eurozone March PMI hits 10-month low, German and French economies in double distress.

Notice that Iran war has pushed up inflation and threatened the emerging economic recovery, the eurozone private sector activity increased at the slowest pace since May last year. The region's Standard&Poor's Global Composite Purchasing Managers' Index (PMI) dropped to 50.5 from last month's 51.9, but still above the 50 mark, the dividing line between expansion and contraction. Analysts had previously expected the figure to slightly drop to 51. Eurozone private sector activity slowed down As the largest economy in the region, Germany's composite reading fell more than expected, but remained above 50. France's situation is worse, staying below that level for the third consecutive month. In both cases, the service sector performed weakly, while manufacturing showed a better performance. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said in a statement on Tuesday, "With rising prices due to the Middle East war and growth suppressed, the Eurozone PMI flash reading rings the alarm bell of stagflation," "As energy prices surge and supply chains are disrupted due to the war, businesses' costs are rising at their fastest pace in over three years." The conflict in the Middle East threatens the already moderate economic growth and market bets need higher interest rates to calm down the soaring inflation. Although hopes are still high for a quick end to the conflict, investor sentiment is plummeting significantly as evidence shows prolonged damage to oil and gas infrastructure. The European Central Bank is currently in a wait-and-see mode, wary of the possibility of U.S. President Trump changing strategies in the short term. But sources familiar with the matter revealed that officials do not rule out the possibility of raising borrowing costs as early as the next policy meeting in April. "We have not yet seen stagflation, but risks are moving towards stagflation," said ECB Executive Board member Bostjan Vasle in an interview, urging colleagues to maintain a "high level of flexibility and vigilance." David Powell, Senior Eurozone Economist at BE, pointed out, "The Eurozone's composite PMI survey shows a significant slowdown in the economic activity of the currency union due to the dragging effect of the Middle East war. In addition, as the March expectations supporting manufacturing fade, the situation may worsen in the coming months. The ECB may be underestimating the negative impact on output and may ultimately have to backtrack on its hawkish rhetoric." After the PMI data release, the yield on German 10-year government bonds remained stable at around 3%, the euro continued to decline, falling 0.2% to $1.1593. The currency market is increasing bets on monetary tightening, with expectations of a rate hike of about 70 basis points by the end of the year. Standard&Poor's Global stated that the PMI shows the largest drop in future output expectations since the Russia-Ukraine conflict four years ago, and pointed out that input prices have increased at the fastest pace since February 2023. "The outlook depends on the duration of the war and any potential enduring impacts on energy and supply chains, but the PMI flash data highlights that the ECB is no longer in a 'comfort zone' for inflation," Williamson said. Faced with significant and rising risks of stagflation in the coming months, "it will have to take a cautious path in terms of policy." PMI indices are closely watched by the market because they are released at the beginning of the month and can provide a good insight into economic trends and turning points. As a measure of the breadth rather than the depth of output changes, business surveys are sometimes difficult to directly correspond to quarterly GDP. The overall reading in the UK fell more than estimated, but remained above 50. The U.S. indicators expected to be released later in the day are forecasted to remain at 51.9.