Eurozone economy contracts at fastest pace in over two years as inflation dampens demand

The eurozone economy contracted in May at its fastest pace in more than two and a half years, as war-driven price pressures, higher input costs and weak demand hit businesses across the currency bloc, according to a survey published Thursday. The slowdown comes as the European Commission also warned that the region’s growth outlook is likely to weaken in 2026 because of the repercussions of the war in the Middle East.

S&P Global’s flash composite purchasing managers’ index, which measures activity across manufacturing and services, fell to 47.5 in May from 48.8 in April, its lowest reading since October 2023. Any figure below 50 signals contraction, meaning the private sector shrank for a second straight month. The services sector, which makes up most of the eurozone economy, was particularly weak, underscoring how rising living costs and caution among consumers are weighing on demand.

The report also showed inflationary pressure remains stubbornly high. Higher input prices pushed overall cost inflation to a three-and-a-half-year high, complicating the European Central Bank’s effort to bring price growth back to its 2% target. In April, inflation in the euro area was still running at 3%, above the ECB’s goal, after a long period in which higher energy prices and supply disruptions kept costs elevated.

The latest figures matter because they suggest the eurozone is still struggling to regain momentum after a prolonged period of stagnation. Earlier forecasts from European and international institutions had pointed to a gradual rebound, helped by easing inflation and stronger real incomes. But fresh trade and geopolitical tensions, including the impact of war in the Middle East, are clouding that outlook and raising the risk that companies delay hiring and investment.

The European Commission’s warning about 2026 adds to those concerns. Its assessment points to weaker growth next year as the spillover effects of conflict, higher uncertainty and continuing price pressures filter through the economy. That could leave policymakers with a difficult balancing act: supporting growth without allowing inflation to stay too high for too long.

For households and businesses across the eurozone, the combination of slowing activity and persistent inflation means borrowing, spending and investment decisions are likely to remain cautious in the months ahead. The European Central Bank has kept rates unchanged recently, but it has been weighing how long to maintain restrictive policy as it tries to bring inflation fully under control while avoiding a deeper economic slowdown.