A survey reveals that supply chain disruptions have artificially boosted Eurozone manufacturing growth figures, pushing the March manufacturing growth rate to its strongest level in nearly four years. However, underlying demand remains weak, and a surge in input costs, driven by the conflict involving Iran, is threatening the sector's fragile recovery.

Conflict in the Middle East has disrupted global logistics networks, causing delivery delays. This has partly inflated the overall growth metrics while also driving input price inflation to its highest level since October 2022. Data shows the Eurozone's S&P Global Manufacturing Purchasing Managers' Index (PMI) rose to 51.6 in March from 50.8 in February, exceeding the preliminary estimate of 51.4. A reading above 50 indicates expansion in the sector.

"The conflict in the Middle East has left its mark on Eurozone manufacturing," said Joe Hayes, Principal Economist at S&P Global Market Intelligence. "As logistics markets readjust to disruptions in sea freight, supplier delivery times lengthened substantially, while a surge in oil and energy prices drove input cost inflation at factories to its highest level since late 2022."

The new orders sub-index, a key gauge of demand, remained at the 46-month high recorded in February, though the pace of growth remained modest. Output increased for a third consecutive month, with the output sub-index edging up to 52.0 from 51.9, reaching a seven-month high. New export orders stabilized after eight consecutive months of contraction, providing some relief to manufacturers.

Backlogs of work increased for the first time since mid-2022, indicating capacity pressures, yet companies accelerated the pace of job cuts in March. Driven by rising oil and energy prices, input cost inflation surged to a 41-month high. In response, manufacturers raised their selling prices at the fastest pace in over three years.

Hayes added, "We saw some of the war-driven inflationary pressures directly passed through to final prices in March, which weakens the competitiveness of the Eurozone."

Business confidence, affected by the conflict, fell to a five-month low and remained below the long-term average. Among individual countries, Germany and Italy saw their PMI readings hit 46-month and 37-month highs, respectively. Spain was the only nation where the sector remained in contraction. Greece recorded the highest PMI, followed by Ireland, while manufacturing in France stagnated.