Eurozone Manufacturing Slumps to 31-Month Low as Middle East Conflict Weighs on Growth

Steep Decline in Activity Indicators

Combining the PMIs for services and manufacturing, the composite PMI fell from 48.8 in April to 47.5 in May—the lowest level in 31 months. This sharp deterioration represents a significant warning sign for European economic growth heading into the second half of 2026.

Conflict-Driven Weakness

S&P Global said that this decline is largely due to the Middle Eastern conflict. It noted that composite output fell at the steepest rate in two and a half years, and concluded that the PMIs are consistent with a modest decline in real economic growth in the second quarter. The manufacturing PMI for eurozone fell from 52.2 in April to 51.4 in May, indicating modest growth.

Erosion of Growth Supports

S&P Global said that "there has been some support to manufacturing from precautionary stock-building," yet "this boost is starting to fade." This suggests that the temporary inventory-building that had supported activity in recent months is losing momentum as businesses adjust to the conflict's economic impact.

Growth Forecast Downgrades and Policy Response

European economies now expect real GDP contractions, albeit short-lived and modest in scale, in many of Europe's largest economies, including Germany, France, Italy and the UK. The key changes to forecasts in May include adding additional rate hikes in Western Europe this year, led by the European Central Bank, contributing to projected quarter-over-quarter real GDP contractions in many of the region's largest economies. This policy tightening amid deteriorating growth creates a challenging policy bind for European central bankers.