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Stagflation is widely viewed as the worst-case macro scenario, combining high inflation, stagnant growth and rising unemployment. Recent survey data point to mounting pressure on the euro area economy as the Middle East conflict disrupts energy markets and supply chains.
Euro area private-sector output fell to its lowest level in ten months in March 2026, highlighting adverse effects on the global economy. S&P Global data released on March 24 showed the euro-zone Manufacturing PMI declined from 51.9 in February 2026 to 50.5 in March.
The March reading came in below economists’ forecast of 51.0 and close to the 50.0 threshold that separates expansion from contraction.
The data renewed warnings that the region faces stagflation risk. Chris Williamson, chief economist at S&P Global Market Intelligence, said the eurozone PMI is signaling stagflation as the Middle East conflict pushes prices higher and restricts growth.
Williamson added that firms’ costs are rising at the fastest pace in more than three years, driven by higher energy prices and disrupted supply chains. He noted that supply delays reached their highest level since mid-2022, largely linked to seaborne transport disruptions associated with the conflict.
The stagflation scenario places central banks in a difficult position. Conventional tools used to curb inflation, such as rate hikes, could further weaken growth and employment. Conversely, cutting rates to support activity could risk adding fuel to inflation.
The slowdown is not limited to Europe. On the same day, India’s PMI data showed production growth slowing to its weakest pace since October 2022, also attributed to the Middle East conflict.
This added uncertainty makes earlier growth and inflation forecasts less reliable.
In its projection from last week, the ECB estimated growth of 0.9% for the euro area in 2026 and inflation averaging 2.6%. S&P Global cautioned that the inflation figure could be overly optimistic, noting that price data suggest inflation could rise toward nearly 3% in the coming months.
Raphael Brun-Aguerre, an economist at JPMorgan, said energy-price shocks not only pressure corporate profits but also undermine demand and consumer confidence in Europe.
Against the backdrop of the global energy crisis, European Commission President Ursula von der Leyen said on March 24 that it is time to begin negotiations with Iran. She emphasized the importance of a negotiated solution to end hostilities in the Middle East, ease pressure on oil and gas prices, and protect global stability and the world economy.
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