Global manufacturing activity displayed a clear regional split in May as the U.S.-Israeli conflict with Iran, which began in late February, created trade disruptions and heightened concerns about energy flows through the Strait of Hormuz. Surveys released on Monday showed European factories weakened by falling demand and sharply higher raw material costs, while many Asian factories increased activity as companies sought to secure inventories against potential supply interruptions.
S&P Global’s Eurozone Manufacturing PMI slipped to 51.6 in May from April’s near four-year high of 52.2, though it was slightly above an earlier estimate of 51.4. Any reading above 50.0 signals expansion in activity. The drop, however modest, came alongside survey evidence of pressure on prices: input costs rose at the fastest pace in four years.
“Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
At the country level, Germany’s manufacturing sector effectively stalled in May, while French factories recorded a contraction for the first time since November. In the United Kingdom, factories increased their selling prices at the fastest rate since June 2022 as producers passed on sharply higher input costs to customers.
Monetary policy expectations have adjusted in response to the inflationary pressures. A majority of economists polled in May expect the European Central Bank to raise its deposit rate this month and to deliver at least one further hike later in the year, aiming to prevent higher energy costs from feeding through into core inflation. Official inflation data due on Tuesday is expected to show that inflation moved further above the ECB’s 2% target in the most recent month.
By contrast, much of Asia showed expanding factory activity as firms moved to build inventory buffers amid uncertainty. China’s private sector gauge, the RatingDog China General Manufacturing PMI compiled by S&P Global, slowed to 51.8 in May from 52.2 in April but remained above the 50 threshold and slightly better than the 51.6 forecast. That private-sector reading diverged from an official survey that indicated factory activity in the world’s second-largest economy had stalled, with new orders contracting while input costs continued to climb.
Japan’s manufacturing PMI stood at 54.5 in May, down modestly from April’s more than four-year high of 55.1. Despite the deceleration in the pace of expansion, Japanese firms reported the sharpest rise in input costs since September 2022, attributing the jump to higher raw material prices.
South Korea registered a notable increase in activity, with its PMI rising to 54.8 in May from 53.6, the fastest pace since March 2021. Survey responses from South Korean manufacturers pointed to a deliberate effort to lock in supplies. Other Asian economies also recorded expansions: Vietnam’s PMI climbed to 52.8 from 50.5, Taiwan’s rose to 56.1 from 55.3, and the Philippines’ index jumped to 50.8 from 48.3.
The pattern across surveys highlights a divergence in how manufacturers are responding to the same geopolitical shock. In Europe, firms are experiencing weaker demand and mounting input cost pressures that are squeezing margins and nudging prices higher for buyers. In Asia, activity gains are being driven in part by precautionary stockpiling and efforts to secure supply lines, even as input costs increase.
Summary
May manufacturing surveys show the Iran war has suppressed demand in Europe and driven raw material costs up sharply, while many Asian producers expanded activity to build inventories against possible supply disruptions. Key PMI readings varied across regions and countries, and central banks are eyeing tighter policy to contain inflation risks tied to higher energy prices.
Key points
- Eurozone PMI eased to 51.6 in May from 52.2 in April; input costs rose at the fastest rate in four years.
- Germany’s manufacturing stagnated and France contracted, while British factories hiked prices at the fastest pace since June 2022.
- Asian manufacturers generally expanded: China’s private-sector PMI edged to 51.8, South Korea’s hit 54.8, Japan stood at 54.5, Taiwan at 56.1, Vietnam at 52.8 and the Philippines at 50.8.
Risks and uncertainties
- Escalation of the Iran conflict could further disrupt trade routes and energy shipments, particularly through the Strait of Hormuz - this would affect energy-intensive industries and transport sectors.
- Persistent increases in input and energy costs risk pushing headline and core inflation above central bank targets, prompting additional monetary tightening that could weigh on manufacturing demand and investment.