Euro Under Pressure: How the Iran Conflict Fuels Growth Concerns in Europe

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The eurozone economy is losing significant momentum: The composite purchasing managers' index (PMI) from S&P Global fell to 50.5 points in March 2026, down from 51.9 points in February. Analysts had expected a reading of 51.0. This is the weakest value in ten months and is only just above the 50-point threshold that separates growth from contraction. Economists identify the economic impact of the Iran conflict as the main cause, which is putting pressure on both energy prices and global supply chains.

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Stagflation patterns emerging

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The current PMI values signal a classic stagflation scenario: weakening growth coupled with accelerating inflation. According to S&P Global calculations, the survey values suggest that eurozone gross domestic product will grow at only just below 0.1 percent quarterly in the first quarter of 2026. The Hans-Böckler Foundation projects total growth for 2026 at just 0.9 percent in its IMK forecast, with a recovery to 1.6 percent in 2027.

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Cost developments are particularly alarming: Input cost inflation in the eurozone accelerated to its fastest pace since February 2023. Supplier delivery times reached their worst level since August 2022. According to S&P Global, the price index signals that consumer price inflation could rise again toward three percent.

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Energy prices and logistics chains as main drivers

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Military tensions in the Strait of Hormuz region – one of the world's most important transport routes for oil and gas – are having a massive impact on the European economy. Sharply rising energy and fuel prices are burdening both businesses and consumers. The Hans-Böckler Foundation warns that energy, fuel, and electricity prices could continue to rise in the short term, which would increase inflation rates in Europe and drive up consumption costs.

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Judah Levine, research director at freight platform provider Freightos, is already observing concrete impacts: \"The US-Israeli attacks on Iran and the subsequent Iranian response are causing massive disruptions in the region's logistics.\" Several shipping companies have suspended bookings to Persian Gulf ports due to military risks. The disrupted supply chains in shipping are driving up transportation costs and intensifying price pressures.

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Services sector particularly affected

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The growth slowdown is primarily due to the services sector, whose activity nearly stagnated in March. New orders declined for the first time in eight months – a clear sign of weakening demand. The services sector accounts for approximately 70 percent of eurozone economic output, so weakness in this area weighs heavily on overall development.

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The combination of rising operating costs due to higher energy prices and declining demand is putting pressure on businesses. Many companies cannot pass on increased input costs to customers in full, which reduces profit margins.

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Minimal direct trade, maximum impact

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Paradoxically, the Iran conflict is hitting the European economy hard despite the EU conducting minimal direct trade with Tehran. The effects operate through indirect channels: Middle East tensions drive global energy prices regardless of whether Europe directly purchases Iranian oil. Additionally, European companies use transport routes through the region for trade with Asia, so disruptions in the Strait of Hormuz have far-reaching consequences.

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Markets price in ECB policy shift

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The escalating inflation dynamics are also changing expectations regarding European Central Bank (ECB) monetary policy. According to market reports, investors have begun pricing in a possible ECB rate hike in 2026 instead of the previously expected further rate cuts. The central bank thus faces a dilemma: On one hand, more restrictive monetary policy would dampen inflation; on the other hand, it could further stifle already weak growth.

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The coming weeks will show whether the stagflation signals intensify or whether the eurozone economy can demonstrate its resilience. Crucial will be how geopolitical tensions develop and whether energy prices remain at current levels or continue to rise.

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