Antje Praefcke at Commerzbank warns that Eurozone PMIs (Purchasing Managers' Index) may slip to or below 50 in April as the Middle East war weighs on orders and production. She argues that persistent high energy prices complicate the European Central Bank's (ECB) task by raising second‑round inflation risks while also threatening growth, making the policy trade-off tougher and the Eurozone outlook gloomier.

War, PMIs and ECB policy dilemma

"After the German ZEW Index for April already disappointed yesterday, today’s purchasing managers’ indices from the euro zone are also likely to be heavily influenced by the war in the Middle East. They had already seen a slump in March due to the war, but remained above 50 and thus in expansionary territory, as a quick resolution to the conflict was considered possible."

"In April, however, the PMIs could even fall to or below 50, which would signal a contraction. After all, the first effects of the war could indeed be reflected in order books and production in April."

"The longer energy prices remain elevated, the more likely second-round effects are to occur - meaning the probability that the price shock is temporary decreases. Consequently, the ECB would need to act all the sooner."

"For the longer the conflict persists, the greater the ECB’s dilemma becomes, and the gloomier, in my view, the outlook for the euro zone - and thus, ultimately, for the euro."

"But at the same time, a prolonged conflict and high energy prices also increase the risk that the consequences for the economy will be more pronounced and that a downturn could loom, which in turn could be sharpened by rising interest rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)