Euro Zone Business Activity Contracted in April as Costs Rocketed, PMI Shows

Euro Zone Business Activity Falls in April as Costs Surge, PMI Data Shows

Euro Zone Business Activity and Economic Impact

LONDON, April 23 (Reuters) - Business activity in the euro zone suffered a surprise contraction in April with the U.S.-Israeli war with Iran sapping demand as prices soared, a closely watched survey showed on Thursday.

Demand for services sank but was contradicted by an unexpected rise in manufacturing momentum.

PMI Data and Market Expectations

The S&P Global Flash Eurozone Composite Purchasing Managers' Index fell to 48.6 in April from March's 50.7, far below expectations in a Reuters poll for a more modest dip to 50.1.

That was beneath the 50.0 mark separating growth from contraction.

Expert Commentary on Economic Woes

"The euro zone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers," said Chris Williamson, chief business economist at S&P Global.

"Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding more upward pressure to prices in the coming weeks."

Rising Costs and Sector Performance

Since the conflict began nearly two months ago fuel prices have rocketed. The input price index jumped to 68.4 from 65.3, its highest reading since late 2022.

Services Sector Weakness

An index covering the bloc's dominant services industry sank to 47.4 from 50.2, far below a median prediction in the Reuters poll for a gentler slide to 49.8.

Demand for Services

Demand for services fell at the sharpest rate since October 2023. The new business index came in at 46.3 compared to 48.6 last month.

Manufacturing Sector Resilience

The manufacturing PMI was 52.2, up from March's 51.6, confounding poll expectations for a fall to 50.9. An index measuring output nudged higher to 52.2 from 52.0.

Production Costs in Manufacturing

But factories faced soaring production costs. The input prices index surged to 76.9 from 68.9.

Monetary Policy Response

Soaring price pressures have led to financial markets pricing nearly four rate hikes by the European Central Bank this year, starting June. 

ECB's Dilemma

"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," Williamson added.

(Reporting by Jonathan Cable; Editing by Joe Bavier)