Final data released on Wednesday confirmed that Eurozone business activity contracted in April for the first time in nearly a year and a half, deepening a policy dilemma for the European Central Bank as it weighs rising inflation against faltering growth.
Services Slump Drags Economy Into Contraction
The S&P Global Eurozone Composite PMI fell to 48.8 in April from 50.7 in March, matching its preliminary estimate and hitting a 17-month low. The services sector bore the brunt of the downturn, with the Services PMI plunging to a 62-month low of 47.6, down from 50.2 the previous month. Demand weakened at the sharpest pace since October 2023, while new export business also deteriorated as the Middle East conflict weighed on consumer-facing sectors.
Germany, France, and Spain all registered contractions in private-sector activity, with the two largest Eurozone economies reporting their steepest declines in over a year. Manufacturing provided a counterpoint, with its PMI rising to a 47-month high of 52.2, but the improvement was not enough to offset the services collapse.
BNY Warns of Stagflation Trap
Analysts at BNY highlighted the growing stagflation risk facing the region. “Input costs rising to a 40-month high and output prices increasing at the fastest rate in three years, reinforcing stagflation risks,” the bank noted. Industrial producer prices rose sharply in March, up 3.4% month-on-month, with annual growth reaching 2.1%.
BNY challenged the market assumption that ECB policy cannot diverge much from its peers, arguing that softer demand and tightening could see the euro underperform on a relative-value basis.
ECB Faces June Decision
The ECB held its deposit facility rate at 2% on April 30 but “extensively debated” a potential hike, with Bundesbank President Joachim Nagel warning the Governing Council should “react in June if the outlook does not significantly improve”. Markets now price three rate increases over the coming year. The weak PMI data complicates any move, however, as tightening into a contracting economy risks deepening the slowdown — while inaction could allow inflation, already at 3% in April, to become entrenched.
