March PMIs: scent of stagflation

March flash PMIs offer a timely window into the effects of the Gulf War on the global economy.¹ Survey results indicate an increased risk that the shock to maritime traffic and commodity prices will plunge the global economy into stagflation. This is a situation in which stagnation or recession in economic activity is accompanied by rising inflation, posing a dilemma for economic policy: whether to prioritise supporting growth or maintaining price stability. A similar situation occurred in the 1970s following the OPEC embargo on oil exports.

Specifically, the median PMI new orders indices fell in both the manufacturing and services surveys, and more so in the latter. Among the most affected sectors are those related to transportation and tourism. According to the surveys, the decline in demand reflects increased uncertainty and fears about the cost of living and rising interest rates. Also notable are the reported increases in delivery times and widespread delays in global supply chains.

The impact of the Gulf War is also being felt in input prices. The composite PMI median rose to its highest level since early 2023, driven primarily by higher input prices for manufacturing firms. The median of input price indexes in the services sector also increased, albeit at a slower pace. This is typical of turning points in the inflation cycle, which see a sudden impact on production costs that is passed on to the final prices of goods and services over a longer period of time. While it is therefore too early to conclude how severe the Gulf War's impact on inflation will be, the longer commodity prices remain high, the greater the risk of an extended increase in consumer prices.

It is also notable that the national composite PMI indices show how the crisis has had asymmetric effects across different economic areas. The US economy appears to have been less affected than the rest of the world. The difference likely reflects the fact that the US economy is less affected than Europe and Asia by the disruption to trade from the blockade of the Strait of Hormuz, primarily with regard to the availability of energy inputs.

This evidence helps explain why, since the beginning of the war on 28 February, US asset prices have suffered less than those in other economic areas and the US dollar has appreciated against other major currencies.
To conclude, initial evidence on the effects of the war emerging from business surveys points to the risk that the global economy could fall into stagflation. Historical evidence suggests that how this risk evolves will be a function of the duration of the shock to international trade and commodity prices caused by the closure of the Strait of Hormuz.

¹ Flash Purchasing Managers’ Index data are available for Australia, eurozone, France, Germany, India, Japan, UK and the US. In this note, for the eurozone we only considered the aggregate data.