Economic activity across the eurozone fell in May at its steepest rate in more than two and a half years, as rising living costs linked to the Middle East conflict weighed heavily on demand and pushed inflationary pressures to multi-year highs.
According to S&P Global’s Flash Eurozone Composite Purchasing Managers’ Index, business activity dropped to 47.5 in May from 48.8 in April, marking its lowest level since October 2023. The reading also came in below market expectations and signalled a second consecutive month of contraction across the bloc’s private sector. A reading below 50 indicates declining activity.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the latest data pointed to “an increasingly severe toll from the war in the Middle East” on the eurozone economy. He added that output trends suggest the region could contract by 0.2% in the second quarter.
Weak demand was a central feature of the downturn. New orders across the private sector fell at their fastest pace in 18 months, while export orders recorded their sharpest decline since early 2025. Services activity, which plays a dominant role in the eurozone economy, weakened significantly, alongside renewed contraction in manufacturing demand after a brief improvement in April.
The services sector, in particular, recorded its sharpest decline since early 2021, with the Flash Services PMI falling to 46.4 from 47.6. Economists had expected a slight improvement. Analysts attributed the weakness largely to reduced consumer spending power as higher energy costs continued to filter through the economy.
Price pressures intensified further. Input cost inflation climbed to its highest level in three and a half years, while prices charged to customers rose at the fastest pace in 38 months. S&P Global warned that current trends point to inflation hovering close to 4% in the coming months, well above the European Central Bank’s 2% target.
Labour market conditions also deteriorated. Eurozone firms cut jobs for a fifth consecutive month, with employment declining at the fastest rate since late 2020. Services companies reduced staffing levels for the first time since 2021, while manufacturing job losses continued.
Business sentiment weakened further, with confidence falling to a 32-month low. Services firms reported the most pessimistic outlook since late 2022, reflecting growing concerns about sustained cost pressures and weakening demand across key sectors.
The European Central Bank held interest rates steady last month but acknowledged internal debate over a possible hike as inflation remains persistently above target. The latest data is likely to add pressure on policymakers as they weigh slowing growth against stubborn price increases.
