Europe’s economy is showing fresh signs of weakness as higher energy prices, cautious spending, and global tensions put more pressure on businesses across the euro zone. Could the region be heading toward another economic slowdown just as inflation was starting to ease?
New data from S&P Global showed business activity across the euro zone weakened sharply in May. The Flash Euro Zone Composite PMI fell to 47.5 from 48.8 in April, its lowest level since October 2023. Since any reading below 50 signals contraction, the figures suggest the regional economy is still losing momentum.
Consumers pull back as service sector weakens
Much of the weakness came from the services sector, which covers industries like tourism, restaurants, retail, travel, and finance. Rising living costs and expensive energy bills appear to be making households more careful with spending.
The Flash Services PMI fell to 46.4, its weakest reading since early 2021. Families cutting back on non-essential spending is now becoming a larger problem for businesses that rely heavily on consumer demand.
Germany and France, the euro zone’s two largest economies, both reported weaker business conditions. German business activity declined for a second straight month, while France posted its weakest reading in more than five years. Many companies blamed higher fuel costs, economic uncertainty, and weaker customer demand for the slowdown.
Inflation and shipping disruptions deepen pressure
Manufacturing activity also softened. Although factory readings stayed slightly above the contraction line, economists warned the numbers may look stronger than reality because shipping disruptions linked to tensions around the Strait of Hormuz are delaying deliveries and distorting supply data.
Inflation pressures continue creating another major headache. Businesses reported the fastest rise in operating costs in three-and-a-half years and are increasingly passing those costs onto customers. Analysts now expect inflation across the euro zone to remain near 4% in coming months, still far above the European Central Bank’s 2% target.
That leaves the ECB facing a difficult question: fight inflation harder or avoid pushing the economy deeper into slowdown? Expectations are now growing that another interest rate hike could arrive as early as June despite mounting recession fears.
