The war in the Middle East, involving Iran, has now done what no trade dispute, tariff threat or industrial malaise of the past two years managed to achieve.
According to a flash Purchasing Managers’ Index (PMI) surveys released Thursday by S&P Global, business activity across the euro area fell sharply in April.
The services sector, the engine of the bloc’s 2025 recovery, posted its weakest reading since the pandemic lockdowns of early 2021.
Input costs surged to a more than three-year high. Business confidence dropped to its lowest since late 2022.
Weakest level in over a year
The flash Eurozone Composite PMI fell to 48.6 in April from 50.7 in March, well below the 50 line that separates growth from contraction. This is the weakest level in around a year and a half.
The services PMI dropped to 47.4 from 50.2, which is effectively the weakest reading since the pandemic lockdowns of early 2021.
“The eurozone is facing deepening economic woes from the war in the Middle East. The conflict has pushed the economy into decline in April, while driving inflation sharply higher,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.
Manufacturing, paradoxically, went the other way.
The factory PMI climbed to 52.2 from 51.6, a nearly four-year high, while the manufacturing output index rose to an eight-month high.
But the gain is misleading. Companies across the bloc are ordering inputs ahead of expected shortages and further price increases, lifting headline output figures in a way that reflects defensive stockpiling rather than recovering demand.
Suppliers’ delivery times in the eurozone manufacturing sector lengthened to the greatest extent since July 2022, a direct consequence of the supply-chain disruption tied to the Middle East war.
“April’s flash PMI has moved into contraction territory for the first time since late 2024, signalling a 0.1% quarterly rate of GDP decline after a 0.2% gain had been signalled for the first quarter,” Williamson added.
The cost side of the survey is where the stagflation signal becomes unmistakable.
Input costs rose at their fastest pace since late 2022, while output prices hit a peak not seen in just over three years.
Every major economy recorded a downside surprise at the composite level.
Germany saw its first contraction in activity in almost a year, while France’s slowdown deepened to its weakest level in over a year.
“The recovery in the German economy has been stopped in its tracks by the war in the Middle East,” said Phil Smith, economics associate director at S&P Global Market Intelligence.
In German manufacturing, input price inflation hit a 3.5-year high. In France, it touched a three-year high.
“The [French] service economy has deteriorated due to a diminishing willingness to spend — a typical consequence of uncertainty — pulling overall business activity levels lower,” said Joe Hayes, principal economist at S&P Global Market Intelligence.
IMF slashes every major European forecast
The euro area took the biggest growth downgrade among major advanced economies from the International Monetary Fund’s April 2026 World Economic Outlook.
IMF staff now expect euro area growth to decline from 1.4% in 2025 to 1.1% in 2026 and 1.2% in 2027.
Both 2026 and 2027 forecasts were revised down by 0.2 percentage points versus the January 2026 Update.
Germany absorbed the largest hit, with its 2026 and 2027 growth forecasts both cut by 0.3 percentage points.
Italy stayed stuck at 0.5% annual growth across both years, already the weakest baseline in the eurozone.
Spain decelerated from 2.8% in 2025 to 1.8% in 2027. France held flat at 0.9% on the annual measure but loses 0.3 points on the Q4-over-Q4 profile that captures end-of-year momentum.
The IMF attributed the revision to the effect of better-than-expected growth at the end of 2025, giving way to the negative impact of the Middle East conflict over time.
That, it noted, will add to the lingering effects of the persistent rise in energy prices since Russia’s invasion of Ukraine, dragging on manufacturing, with additional pressure from the real appreciation of the euro relative to currencies of countries exporting similar products.
The ECB’s stagflation dilemma returns
Data from April placed the European Central Bank in the same uncomfortable position it faced a month ago, only sharper.
The standard monetary policy toolkit offers no clean answers.
“The ECB once again has the unenviable task of deciding whether to raise interest rates in the face of the worrying inflation picture, or whether this price spike will prove temporary and its focus should instead be on the need to prevent the economy sliding into a deeper downturn,” Chris Williamson said.
Prediction markets currently price the probability of an ECB rate hike in 2026 at around 72%, up sharply from low double digits before the Strait of Hormuz closure.
Goldman Sachs: This shock is not 2022
Goldman Sachs economist Niklas Garnadt argued this week that the current Hormuz shock differs from the 2022/23 European energy crisis along three dimensions.
First, the price move is smaller and less persistent. Goldman now sees Brent averaging $83 per barrel in 2026 versus $64 before the conflict, and European TTF gas at €44 per megawatt hour against €34 — a 20% to 30% annual increase.
By contrast, Brent averaged $99 in 2022 (up 40%), and TTF hit €133 (up 180%).
Second, this crisis is oil-driven, not gas-driven. Oil markets are global, so the damage is less concentrated in energy-intensive industries like chemicals and basic metals but more diffused across export-oriented sectors like autos, machinery and electrical equipment.
Third, Asia is not insulated this time. Chinese petrochemical prices have risen alongside European ones, Goldman’s tracking shows. In 2022, European energy prices roughly doubled while Chinese prices barely moved — triggering a collapse in European net exports. That competitiveness gap is smaller now.
According to the bank, the current shock lowers euro area industrial production by almost 2% by the end of 2027, roughly half the 4% drag from 2022/23.
Brussels has an unused €80 billion lever
If the ECB is constrained, Brussels has an unused tool.
Goldman Sachs economist Filippo Taddei estimated that roughly €80 billion of the European Recovery Fund is unlikely to be disbursed before the programme’s end-of-year deadline.
That envelope could be redirected. There is a precedent: in 2022, the EU created REPowerEU by amending the Recovery Fund regulation, a change passed by qualified majority.
Taddei argues the same mechanism could now fund grid modernisation — repurposing the money, he writes, would “improve the European power grid, which remains the oldest among major economic regions.”
Bottom line: Is a recession forming in plain sight for Europe?
The April PMI data do not yet describe an outright recession.
A 0.1% quarterly contraction is a stumble, not a collapse, and the IMF is still forecasting 1.1% growth for 2026.
But the direction of travel, the speed of the deterioration and the inflation backdrop combine into a picture European policymakers thought they had moved beyond.
What has changed since March is that the survey data no longer describe a risk scenario. They describe the current one.