Recent data indicates a significant slowdown in the eurozone's economic activity. Preliminary PMI figures for March, released on Tuesday, showed a sharp decline in the region's private sector output, hitting a 10-month low.

The closely watched S&P Global Eurozone PMI fell to 50.5 in March, down significantly from 51.9 in February. This reading was worse than the slight drop to 51.0 forecast by economists surveyed by Reuters. A PMI reading above 50 indicates economic expansion, while a figure below 50 signals contraction.

Economists are warning that the eurozone now faces a growing risk of stagflation—a toxic combination of high inflation and stagnant economic growth—exacerbated by the conflict involving Iran.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on Tuesday, "The eurozone PMI is signaling a stagflation risk, with rising prices and subdued growth driven by the Middle East conflict." He noted that business costs are rising at the fastest pace in over three years, fueled by war-driven energy price spikes and supply chain disruptions. Supplier delivery delays have reached their highest level since mid-2022, largely due to shipping issues.

According to S&P Global, surveyed eurozone businesses slightly reduced hiring in March and lowered their output expectations for the year compared to February.

Stagflation is often considered a worst-case scenario for an economy, placing central banks in a difficult position. Measures to combat high inflation, such as raising interest rates, can further suppress growth and employment, while cutting rates to stimulate growth risks fueling demand and pushing inflation even higher.

The slowdown in private sector activity is not confined to the eurozone. Earlier on Tuesday, PMI data from India also showed its output growth slowing to the lowest level since October 2022.

The current turmoil in the Middle East has rendered previous growth and inflation forecasts largely obsolete. With the duration of the conflict uncertain, businesses and policymakers are struggling to predict input costs and inflation trends.

The European Central Bank's revised projections, released last week, forecast eurozone economic growth of 0.9% for 2026, with average annual headline inflation at 2.6%. However, this outlook may be overly optimistic. Williamson pointed out that price indicators within the PMI survey suggest inflation is accelerating toward 3%, and cost pressures could drive selling price inflation even higher in the coming months.

"The economic outlook depends on the duration of the conflict and its potential long-term effects on energy and supply chains," Williamson stated. "But the preliminary PMI data highlights the difficult position the European Central Bank already faces regarding growth and inflation."

Raphael Brun-Agret of J.P. Morgan noted on Tuesday that the March PMI data indicates the Iran conflict is already having a significant impact on the eurozone economy. "Overall, the survey suggests that rising energy prices will substantially boost inflation in the short term, with potential spillover effects into core inflation... The energy price shock is affecting corporate profitability and is already dampening demand and output across the region. Market confidence has been severely hit." Data released by the European Commission on Monday already showed a significant drop in consumer confidence for March.

Amid the growing crisis, European Commission President Ursula von der Leyen stated on Tuesday that, given the global energy crisis has reached a "critical" state, it is time to engage in negotiations with Iran. "The global energy supply situation is now critical. We are all feeling the ripple effects on oil and gas prices, business operations, and society at large. But it is crucial that we find a negotiated solution to end the hostilities in the Middle East."

Earlier reports from Iraqi port officials indicated that two foreign-flagged oil tankers near Basra, Iraq, were attacked by unidentified assailants. One tanker, carrying Iraqi fuel oil, was damaged by fire.