A surge in inflation and a clear loss of growth momentum has begun to filter through the global economy, as flash PMI data from S&P Global for March captured the early economic impact of the war in the Middle East.

Growth slowed across all major markets. The UK, eurozone and US remained in expansion territory, but only just, while Australia tipped into contraction and momentum faded across Asia. At the same time, input costs climbed at the fastest pace in years, raising the risk that inflation pressures were re-accelerating just as demand weakened.

The latest readings underline the breadth of the shift. The UK’s composite PMI fell to 51.0 (from 53.7), the eurozone dropped to 50.5 (from 51.9) and the US eased to 51.4 (from 51.9). Japan slowed to 52.5 (from 53.9), while India, though still the strongest performer, declined to 56.5 (from 58.9), according to the HSBC Flash India PMI. Australia stood apart, with its composite PMI plunging to 47.0 (from 52.4), marking its first contraction in 18 months.

Taken together, the data pointed to a synchronised slowdown, with rising cost pressures and weakening demand beginning to pull global growth off balance.

Inflation shock takes hold

The most striking commonality across all six economies was the speed and breadth of the inflation shock, driven primarily by energy prices and supply chain disruption. In the UK, cost pressures intensified sharply. Manufacturing input prices rose at their fastest pace since October 2022, with the index jumping by more than 14 points month-on-month. This represented the largest acceleration in input price inflation since 1992, underlining the scale and suddenness of the shock.

The eurozone showed a similarly abrupt shift. Input costs rose at their fastest rate in just over three years, while supplier delivery times deteriorated to their worst level since August 2022, pointing to renewed strain in supply chains. Although firms increased selling prices, the pace of pass-through remained more limited than the rise in costs, suggesting mounting margin pressure.

In the US, input cost inflation hit a ten-month high, feeding through to the largest increase in selling prices since August 2022. Survey data indicated consumer price inflation was running close to 4%, even as output growth slowed, highlighting the increasingly difficult trade-off facing policymakers.

Australia recorded one of the sharpest cost shocks, with input price inflation reaching a more than three-year high. Firms responded with the fastest increase in output prices since August 2023, as higher fuel and raw material costs fed quickly into charges.

Across Asia, cost pressures also built. India reported input price inflation at a near four-year high alongside a marked rise in selling prices, while Japan saw its fastest increase in input costs for 11 months, driven by energy prices, currency weakness and rising labour costs.

Chris Williamson, chief business economist at S&P Global Market Intelligence, says the eurozone data are already “ringing stagflation alarm bells,” with firms facing rapidly rising costs alongside slowing growth.

Growth loses momentum

While inflation accelerated, growth lost momentum across most regions, as demand weakened and new orders began to contract. In the UK, the slowdown was pronounced. New business fell for the first time in four months, with firms citing weaker consumer confidence, reduced international travel and project delays linked to the conflict. Export orders dropped sharply, particularly in services, where the decline in overseas demand was the steepest since April 2025.

Williamson notes that “output growth across manufacturing and services has slowed to a crawl,” with UK companies directly linking lost business to the war through higher costs, disrupted supply chains and increased uncertainty.

The eurozone showed a similar loss of momentum, but with a clearer sector split. Growth slowed to its weakest pace in ten months, driven largely by near-stagnation in services, while manufacturing continued to expand modestly. New orders declined for the first time in eight months, and export demand extended its long-running downturn, falling for a 49th consecutive month. Forward-looking indicators pointed to rising downside risks, with output growth tracking close to stagnation and GDP expanding at just under 0.1% on a quarterly basis.

The US presented a more uneven picture. Overall growth slowed to an 11-month low, but divergence between sectors became more pronounced. Services activity weakened sharply amid falling export orders and softer domestic demand, while manufacturing output strengthened, supported by improved order flows and inventory building.

Even so, the broader tone remained one of caution. Firms reported weaker demand linked to cost-of-living pressures and geopolitical uncertainty, while employment declined for the first time in over a year as companies began to trim headcount in response to softer conditions.

Manufacturing resilience versus services strain

One of the clearest themes across the data was the growing divergence between manufacturing and services, though the balance varied by region. In the US, manufacturing output rose and new orders expanded at their fastest pace for five months, while services activity recorded its weakest growth in nearly a year. The split reflected stronger domestic demand and inventory building in manufacturing, contrasted with softer consumption and falling export orders in services.

A similar, though less pronounced, divergence was visible in the eurozone. Manufacturing output continued to expand modestly, supported by improved production trends, while services activity slowed to near-stagnation, acting as the main drag on overall growth.

In the UK, both sectors lost momentum, but manufacturing faced more acute pressure from rising costs and supply chain disruption. Nearly 25% of manufacturers reported longer supplier delivery times, compared with just 2% seeing improvements, highlighting the extent of operational strain.

India showed a different form of divergence. Domestic demand softened across both manufacturing and services, but this was offset by a surge in external demand, with export orders rising at a record pace and providing a key source of resilience.

Japan’s slowdown was more evenly spread, with both manufacturing and services expanding at weaker rates. However, manufacturing sentiment remained comparatively firm, supported by expectations of demand in sectors such as AI, defence and semiconductors, even as services confidence deteriorated.

Australia presented the starkest imbalance. Services activity contracted for the first time in over two years, driving the overall downturn, while manufacturing output declined only marginally, supported in part by stronger export demand.

Asia slows but remains comparatively resilient

Across Asia, the picture was more resilient but increasingly uneven, with growth easing while inflation pressures built. India continued to lead, with a composite PMI of 56.5 (down from 58.9), though this marked its weakest expansion since late 2022. The slowdown was driven by softer domestic demand, with new orders rising at their slowest pace in over three years, even as export orders surged to a record high, highlighting the growing importance of external demand.

Pranjul Bhandari, chief India economist at HSBC, highlights the shift in dynamics: “Output growth eased across both manufacturing and services as the energy shock unfolds. Softer domestic demand weighed on new orders, which rose at the slowest pace in more than three years, despite a record surge in new export orders.”

Cost pressures also intensified. Input prices rose at the fastest pace in nearly four years, spanning a broad range of inputs from energy to metals and food. Firms absorbed part of the increase, limiting the pass-through to customers and placing margins under pressure.

Japan showed a similar cooling trend, but with a different balance of risks. The composite PMI fell to 52.5 (from 53.9), with slower growth in output, new orders and employment. The pace of hiring eased and backlog growth slowed from recent highs, signalling a gradual loss of momentum. Confidence also weakened to an 11-month low as firms assessed the potential impact of the conflict.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence, notes that the slowdown “coincides with the recent outbreak of the war in the Middle East, which contributed to a sharp rise in input costs amid reports of supply chain difficulties and higher prices for fuel.”

She adds that “a weak yen exchange rate and rising labour costs also contributed to the upturn in expenses, further adding to the squeeze on company margins,” pointing to a broader set of cost pressures beyond energy alone.

Despite this, manufacturing sentiment remained relatively robust, supported by expectations of demand in sectors such as AI, defence and semiconductors, even as services firms became more cautious and overall optimism softened.

Supply chains under pressure again

The war also reintroduced strain into global supply chains, with early signs of disruption emerging across shipping routes, input availability and inventory management, though not yet at pandemic-era levels. In the UK, the impact was already pronounced. Shipping routes were rerouted via the Cape of Good Hope, while production stoppages at petrochemical facilities in the Middle East disrupted the supply of key inputs. As a result, supplier performance deteriorated sharply, with around 25% of manufacturers reporting longer delivery times, the worst reading since July 2022.

Eurozone manufacturers reported a similar, if more broad-based, deterioration. Supplier delivery times lengthened to the greatest extent in over three-and-a-half years, reflecting both shipping delays and rising demand for inputs. At the same time, firms continued to run down inventories of both inputs and finished goods, suggesting supply constraints were beginning to outpace replenishment.

In the US, supply chain pressures were reinforced by defensive behaviour. Supplier delivery times lengthened at the fastest pace since October 2022, while purchasing activity rose at one of the strongest rates in the past four years as firms built inventories to secure supply and manage price risk.

Williamson notes that companies are “building safety stocks amid concerns that the war may lead to more protracted supply issues and price rises,” highlighting a shift towards precautionary inventory strategies.

Elsewhere, the picture was more mixed. Japanese firms reported rising input costs and supply-related pressures linked to energy and logistics, though without the same degree of delivery disruption seen in Europe. In Australia, supply chain strain was more closely tied to weaker demand and rising costs, with firms citing broad-based disruption across both goods and services sectors.

India provided a partial counterpoint. Despite rising costs, firms reported improved vendor performance and shorter delivery times, suggesting that supply chains remained relatively flexible and less constrained than in advanced economies, at least for now.

Australia contracts as demand falters

Australia provided the clearest sign of deterioration among the economies surveyed, with its composite PMI dropping to 47.0 (from 52.4), signalling the first contraction in private sector output in 18 months.

The downturn was driven primarily by services, where activity fell for the first time in over two years, while manufacturing output edged only slightly lower. New orders also declined for the first time since July 2024, pointing to a broad weakening in domestic demand, even as export sales rose at their fastest pace in over three-and-a-half years.

At the same time, cost pressures intensified sharply, with input price inflation reaching a more than three-year high and output prices rising at their fastest pace since August 2023, highlighting the squeeze on both demand and margins.

Despite the downturn in activity, firms continued to hire, albeit at a slower pace, suggesting some residual resilience in labour market conditions even as overall momentum weakened.

Eleanor Dennison, economist at S&P Global Market Intelligence, highlights the broader implications: “March's S&P Global Flash PMI data showed the Australian economy on a weaker footing as the opening quarter comes to a close. Business activity contracted for the first time in a year-and-a-half, amid a fresh drop in demand for Australian services and manufactured goods.”

While export demand has strengthened, it “was insufficient to stop a contraction in overall sales,” Dennison noted, adding that the PMI results “provide the first look into the extent to which war in the Middle East has rippled through the global economy,” with firms facing “cost inflationary pressures at their highest in more than three years, faltering demand and supply chain disruption.”

Confidence weakens, but not uniformly

Business sentiment deteriorated across most major economies, reflecting uncertainty around the duration and economic impact of the conflict, and increasingly feeding through into hiring and investment decisions.

In the UK, expectations for the year ahead fell to a nine-month low as firms cited weaker demand, rising costs and geopolitical risk. The drop in confidence coincided with declining new orders and renewed job shedding, suggesting that caution was already translating into reduced activity.

The eurozone saw an even sharper shift. Confidence recorded its largest monthly fall since early 2022, with companies reporting a marked deterioration in future output expectations. The decline was broad-based across both manufacturing and services, reinforcing concerns that the region was moving closer to stagnation.

Japan showed a similar, though less abrupt, weakening in sentiment. Optimism slipped to an 11-month low as firms weighed the impact of higher energy costs and supply chain disruption. Annabel Fiddes notes that companies are becoming more cautious given “so much uncertainty around the length and impact of the Middle East war,” particularly in relation to supply chains and energy costs.

In Australia, confidence fell to a 20-month low, reflecting a combination of weakening demand, rising costs and broader economic uncertainty. The drop in sentiment aligned with the contraction in output and declining new orders, pointing to a more sustained loss of momentum.

In contrast, India remained relatively resilient. Firms continued to express confidence in future output, supported by strong export demand and pipeline activity. Hiring also continued at a solid pace, with employment growth reaching its fastest since August, suggesting that businesses still expected expansion despite softer domestic demand.

Central banks face a familiar dilemma

For policymakers, the combination of rising inflation and slowing growth presents a difficult balancing act. In the UK, Williamson highlights the challenge facing the Bank of England, which must “balance these growth and inflation risks” while avoiding both entrenched inflation and a deeper downturn.

The eurozone faces similar pressures. Williamson warns that the European Central Bank is “no longer in a ‘good place’ with respect to growth and inflation,” with stagflation risks rising.

Across the US, the same trade-off is becoming apparent. PMI data point to inflation accelerating alongside weakening growth, suggesting that policy decisions will hinge on how persistent the current shock proves to be. The outlook across all regions depends heavily on the duration of the conflict and its impact on energy markets and supply chains.

A fragile expansion

The March PMI data offered an early indication of how quickly geopolitical shocks can feed through into the real economy, with inflation, demand and supply chains all reacting in tandem. While growth remained positive across most major economies, the balance shifted. Rising cost pressures began to erode demand, business confidence softened and firms adjusted behaviour, from cutting hiring to building inventories, in response to a more uncertain outlook.

Australia’s contraction underlined how quickly momentum can falter, while the broader slowdown across the UK, eurozone and US suggested limited resilience to further external shocks.

But there were some pockets of strength that persisted, particularly in manufacturing and export-driven markets such as India. However, these areas of resilience were increasingly narrow and, for now, insufficient to offset the wider loss of momentum.

Overall, the flash PMI data for March points to an environment in which the global economy remains in expansion, but with the margin for error narrowing. With inflation pressures re-emerging and growth slowing, the risk is that policymakers are once again forced to navigate a tightening trade-off between supporting activity and containing price pressures.