Energy impact tears apart European economy! PMI plummets to 18-month low, Eurozone plunges into "stagflation" abyss.

S&P Global's latest Eurozone comprehensive PMI data report for May 2026 shows that the Eurozone economy is entering a typical "stagflation pressure" range, with economic activity continuing to contract, demand weakening, employment cooling, but input costs and output prices rising again. PMI data shows that in May, the Eurozone's private sector activity index contracted to its lowest level in 18 months, mainly due to a weakening demand for goods and services - a key indicator of economic health. This has dragged down the composite PMI output for two consecutive months, while cost pressures have risen to their highest level in over three years. The Eurozone composite PMI output index for May fell from 48.8 in April to 48.5, marking the lowest level in 18 months, and has been below the crucial 50-point level for two consecutive months, indicating an accelerated contraction in private sector activity. S&P Global's Chief Business Economist, Chris Williamson, predicts that if there is no significant improvement in June, the PMI points to a risk of economic contraction in the second quarter with a quarter-on-quarter GDP decline of around -0.2%. Eurozone stagflation alert sounded! Middle East geopolitical conflicts may drag down GDP in the second quarter The S&P Global Eurozone composite PMI output index dropped from 48.8 in April to 48.5 in May, marking the lowest reading since November 2024, but still above the initial value of 47.5. Overall services PMI slightly rose from 47.6 to 47.7, performing better than the initial value of 46.4. Readings below 50.0 indicate an economic contraction. Chief Business Economist Chris Williamson said: "With Eurozone business activity declining for two consecutive months in May, the possibility of the economy contracting in the second quarter seems increasingly likely. Unless there is a significant change in June, the PMI data indicates a decline of 0.2% in quarterly GDP." Overall new order data has declined for three consecutive months, marking the second largest drop since November 2024. Overseas demand is a major drag, with export orders falling at the fastest pace so far this year. The worsening situation is concentrated in the Eurozone's two largest economies. Both Germany and France saw contractions in private sector activity, while Italy and Spain achieved modest expansions. Input costs are rising at the fastest pace in three and a half years, while prices charged to customers have hit a 38-month high - this consecutive increase in output prices indicates inflation. Earlier data released on Tuesday showed that Eurozone inflation unexpectedly jumped to 3.2% in May, well above the European Central Bank's target of 2%; with the Middle East geopolitical war significantly pushing up global prices of oil and natural gas, and the Strait of Hormuz still closed, Eurozone inflation is expected to escalate further. According to statistics from the International Energy Agency (IEA), the closure of the Strait of Hormuz by Iran may have led to a loss of supply of approximately 1 billion barrels of oil to the market, marking the largest oil supply disruption in history. Since the start of the Iran war at the end of February, the Strait of Hormuz has been essentially closed, cutting off one of the most core shipping routes for supplying crude oil, natural gas, and refined fuel to global customers, significantly raising energy prices and exacerbating global investors' inflation concerns. In a research report released by Citigroup on Wall Street, it was stated that if long-term peace talks between the United States and Iran remain challenging, leading to a prolonged closure and control of the Strait of Hormuz, the international oil price benchmark Brent crude oil price may rise from around $100, after a recent significant drop, possibly reaching a new high in the short term. The European Central Bank has pointed out that the risks of rising inflation and declining growth have intensified, putting policymakers in a difficult position. Some economists suggest that the ECB's meeting in June will be closely watched, with a possible announcement of a 25 basis point rate hike, raising the benchmark interest rate to 2.25%; however, other economists suggest that the ECB should act cautiously before hiking rates as the economy appears to be stagnating and consumer confidence is weakening. With the PMI data report indicating a decline in new business in the Eurozone, businesses report that idle capacity may continue to increase. Job losses have accelerated at the fastest pace in five and a half years, despite the moderate extent of layoffs. At the same time, backlogs of orders have been cleared at the fastest pace in 14 months, indicating that businesses are not completing more work due to capacity expansion, but rather due to a rapid decrease in unfinished business due to insufficient new orders. The survey report also shows that business confidence has moderately recovered from April, but remains weak by historical standards and far below levels before the outbreak of the Middle East conflict. Stalled growth and resurgent inflation, energy shocks tearing through the European economy Of particular note is the loosening of the labor market in the Eurozone. Employment in the Eurozone's private sector further declined in May, with the pace of job cuts being the fastest in five and a half years. Although the overall magnitude is still moderate, the direction is crucial: the resilience of employment in the service sector has always been a key support for inflation stickiness in the Eurozone, and now the cooling of employment implies that wage pressures may fall in the future, but will also further suppress residents' income expectations and consumption willingness. Employment in the service sector declined for the first time since January 2021, which is a complex signal for the European Central Bank: it helps to curb medium-term inflation, but it also means that if rate hikes continue, economic downside risks will be amplified. The price side is the most policy-impacting part of the entire report. Input costs rose further in May, reaching the highest level in three and a half years; output price inflation reached a 38-month high, accelerating for the third consecutive month. The S&P data report states that input cost pressures are the strongest since the end of 2022, and Chris Williamson even warns that this may suggest inflation approaching 4% in the coming months. This is corroborated by the latest data from Eurostat: the Eurozone's overall inflation rate is estimated to have risen from 3.0% in April to 3.2% in May, with energy prices remaining a major driver. Demand-side data is also becoming weaker. The report shows that new orders for goods and services in the Eurozone have declined for the third consecutive month, although the decline has slowed compared to April, it is still the second fastest decline since November 2024; overseas new orders are a more significant drag, with private sector export orders declining at the fastest pace so far this year. This indicates that conflicts in the Middle East, energy price shocks, global trade uncertainties, and weakened external demand are hitting Eurozone business order books through export channels. In macro policy implications, this PMI report puts the European Central Bank in a dilemma of "simultaneous downward growth and upward inflation." The European Central Bank (ECB) kept its three major rates unchanged at the April meeting and explicitly stated that upward inflation risks and downward growth risks have intensified; but if the cost pressures shown by the PMI continue to pass through to end prices, the market will further bet that the ECB will need to raise rates to prevent inflation expectations from deanchoring. The problem is that the PMI shows weakness in demand, employment, orders, and business confidence, and if policy tightens excessively, it may be equivalent to "raising rates in an economic downturn stage." Therefore, Eurozone assets will undoubtedly continue to be constrained by "stagflation discounts," with the bond market facing inflation risks and rising term premiums, while European stocks will lean more towards defensive sectors, energy transition-capable sectors, and sectors with stable cash flow; cyclical consumption, export manufacturing, and high-leverage industries will continue to be under pressure.