Early industry surveys released this week suggest the conflict involving Iran is beginning to exert measurable pressure on major economies, with higher energy prices and elevated uncertainty pulling on activity and nudging inflation expectations upward.
The initial responses to purchasing managers questionnaires covering firms in the United States, the euro area, Japan and other economies provide what analysts described as the most comprehensive early snapshot yet of a conflict that has been under way for almost four weeks and has effectively taken a substantial portion of global energy supplies offline for an indefinite period.
The jump in the prices of crude oil, natural gas and related energy products presents a dual challenge for economies worldwide: it feeds through into broader inflation while also suppressing demand, creating the potential for slower growth. That combination has already led many central banks to contemplate tighter monetary policy to rein in price pressures.
In the 19-country euro area - among the 21 economies that share the euro currency - private sector expansion largely stalled in March as firms reported longer delivery times and signalled expectations of higher costs they planned to pass on to customers. S&P Global said its flash euro zone composite Purchasing Managers' Index fell to 50.5 in March, down from 51.9 in February and marking a 10-month low, a reading below analysts' expectations. (A PMI reading above 50 denotes expansion in private-sector activity.)
Within euro-area manufacturing, measures of both input and output prices moved notably higher. The national breakdowns showed a sharp decline in business confidence among French companies, while German private-sector growth eased to a three-month low.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the euro area figures were "ringing stagflation alarm bells," a reference to the risk of stagnation combined with rising prices.
S&P Global's flash survey for the United States produced a similar pattern: rising energy costs elevated inflation concerns and weighed on business sentiment, which in turn pointed to weaker private-sector employment prospects. The flash U.S. Composite PMI Output Index fell to 51.4 in March - the weakest since last April - down from 51.9 in February and marking two consecutive monthly declines. The drop in March was concentrated in the services sector.
Other Group of Seven economies also showed signs of slowing. In Britain, S&P Global reported that business activity expanded at the slowest pace in six months, while manufacturers' input costs accelerated at the fastest rate since 1992. In Japan, the flash composite PMI, which combines manufacturing and services, slipped to 52.5 in March from 53.9 in February, its slowest rise in three months.
Outside the G7, India's private-sector growth fell to a three-year low in March, with input costs climbing at their fastest rate since June 2022. Firms in India - which sources roughly 90% of its crude and nearly half of its natural gas from abroad - passed some of those higher costs onto customers while also seeing margins compressed.
Few economists are predicting the conflict will push the global economy into an outright recession at this stage, even as the energy shock deepens following the de facto closure of the Strait of Hormuz - the chokepoint through which around a fifth of the world's oil flows.
"The scenario is very dependent on the duration of the conflict and on the outlook for energy prices," said Nicola Nobile of Oxford Economics, reflecting the contingent nature of the economic outlook.
There is, however, a growing recognition that the economic effects may be persistent rather than short-lived, particularly after damage to energy infrastructure in the Gulf region from Iranian strikes in retaliation for U.S. and Israeli missile attacks. The Organization for Economic Co-operation and Development, in a recent note, said it was too early to quantify the conflict's impact on world growth but warned of a "significant level of downside risk" for the global economy.
Sectoral implications
- Energy - higher oil and gas prices are directly affecting input costs and supply routes.
- Manufacturing - rising input prices and delivery delays are compressing margins and slowing production.
- Services - weaker demand and increased operating costs, particularly in the U.S. and euro-area services sectors, are dampening activity and hiring prospects.
Data referenced in this report come from flash purchasing managers' indices and official statements from economic research bodies as noted above.