Euro Area: March flash PMIs are signalling stagflation risks

In March, the Euro Area flash composite PMI index dropped from 51.9 to 50.5 , a 10 -month low ( chart 1 ) and below expectations (51.0) . Looking at the subcomponents, new orders fell to 4 8 .9 from 51.0, a 15-month low, future output expectations decreased to 56.7 from 61.0 ( chart 2 ) . Notably, the input cost inflation accelerated sharply to 65.5 from 59 following the conflict in the Middle East , the fastest pace i n just over three years. On the one hand, the Services index decreased to 50.1 from 51.9 in February, mainly due to a sharp fall in the New Business component ( to 48.4 from 51 ) and rising input prices ( to 64.5 from 59.3 ). On the other hand, t he Manufacturing index continued to increase and reached 51.4 from 50.8 , its highest level since 2022. The survey details an improvement in the delivery times, output prices and backlog, compensating for the sharp increase in input prices ( to 68.6 from 58 .0 ) . Germany: March’s composite flash PMI came in at 51.9 after 53.2. The manufacturing index crossed the 50 thresholds for the second month in a row, reaching 51.7 after 50.9 , a 49-month high . This improvement was mainly due to the increase in output (+1.2 pt), backlog (+2 pts) and exports (1.6 pt) components and the decrease in delivery time (-7 . 4 pts) compensating for the increase in input prices (+10.6 pts). Services PMI decreased to 51.2 from 53.5 , with business expectations decreasing to 54.2 after 58.8 in February. France: The composite French PMI for March decreased to 48.3 from 49.9 , a 5-month low . Services PMI decreased to 48.3 from 49.6 while the Manufacturing PMI slightly increased to 50.2 from 5 0.1 . The composite index's decline is attributed to a sharp fall in new orders (to 45.8 from 47.7 ), rising input prices ( to 59.7 from 54.0) , and a de crease in the employment component ( to 49.8 from 50.6 ). T he future output component dropped to 54. 9 from 57.5 . Our PMI - based model (chart 3) anticipated Euro A rea GDP growth at + 0.1% Q/Q, slightly below our official forecast ( + 0.2% Q/Q). Today’s PMI s sent a clear message of stagflation risks to the ECB. 2026 isn’t 2022 due to different business cycle dynamics and the review of the strategy allows the ECB to be flexible and pragmatic, focusing on medium-run inflation. However, any evidence of second-round effects will prompt the ECB to act, and every meeting will be live from now (see ECB P ostview ) , with already 2. 7 rate hikes priced by the market by year end .