Europe’s economy is facing mounting pressure as the ongoing Iran war drives up energy costs and weakens business activity across the region. Fresh data showed the euro zone economy contracted at its fastest pace since late 2023, with rising fuel and living costs reducing consumer demand and hurting the services sector. Economists warned the crisis is adding to the financial strain many households have faced since the pandemic-era cost-of-living surge.

The latest S&P Global survey showed the euro zone Composite PMI dropped to 47.5 in May, signaling continued economic contraction, while countries including Germany and France reported declining private sector activity. Businesses cited higher fuel and energy expenses, weaker orders, and growing economic uncertainty as major challenges. Inflationary pressures also intensified, with companies increasing prices at the fastest pace in more than three years.

The worsening outlook is creating a difficult balancing act for policymakers and the European Central Bank. While inflation remains above the ECB’s target, slowing growth and rising job losses are increasing fears of a broader recession. The European Commission has already downgraded its growth forecasts for the euro zone and warned that prolonged energy disruptions could weaken the economy even further in the coming months.

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