The Eurozone composite Purchasing Managers' Index (PMI) for May 2026 fell to 47.5, marking the lowest level in 31 months and signaling a contraction in overall business activity for the second consecutive month [1, 2, 3, 4]. A PMI reading below 50 indicates contraction while readings above 50 signal expansion [1, 2, 3, 4].

The downturn was largely caused by a sharp decline in the services sector, which saw its PMI fall to 46.4, the lowest in 63 months [2, 3]. The manufacturing sector remained in expansion territory with a PMI of 51.4, but growth slowed to its weakest in three months [2, 3]. The services slump was a major drag as companies faced rising costs and weaker demand.

Country-specific data showed France's composite PMI dropped to 43.5, its lowest level in five and a half years, with both services and manufacturing contracting sharply [1, 3]. Germany's composite PMI stayed under 50 at 48.6, indicating ongoing contraction, though it edged slightly higher from April's 48.4 [1, 3].

Rising energy costs caused by the ongoing war in Iran and related geopolitical tensions have increased inflationary pressures across the Eurozone. Input costs and prices for goods and services rose at the fastest pace in more than three years [1, 3, 4]. Joe Hayes, chief economist at S&P Global Market Intelligence, said this "significantly increases recession risks for the Eurozone's second largest economy," adding that rising price levels could further reduce demand [1].

Chris Williamson, chief business economist at S&P Global Market Intelligence, also said inflation is expected to remain close to 4% in coming months. He noted the services sector is "being hit particularly hard by the rise in living costs caused by the war," with firms scaling back activity amid concerns over cost increases and economic outlooks [3, 5].

The contraction in the Eurozone contrasts with robust growth in the United States, where manufacturing PMI rose to a four-year high of 55.3 in May, supported by precautionary stock-building ahead of price pressures linked to the Iran situation. US services PMI also showed moderate growth at 51.7 amid rising prices [5].

The European Central Bank is expected to update its economic forecasts in June 2026 amid ongoing worries about inflation, energy prices, and risks of further interest rate increases [3].