The measurement period included the Iran war, so one could have expected an even worse weakening in sentiment, says Pia Fromlet.
The eurozone's composite preliminary purchasing managers' index for March fell to 50.5. It is still marginally above the 50 mark, which indicates some expansion in activity.
"But if you look at France, Germany and the euro area as a whole, they still point to a risk of a stagflation scenario. There is some concern that we will have weak growth and higher price pressures and inflation," says Fromlet.
Strong price increases
She specifically points to sharp price increases for energy and inputs and extended delivery times - all factors that could push up prices for consumers. In addition, the survey shows widespread concern among companies that the Iran war will not end in the near future.
If you look at the growth forecasts, they will probably be lowered slightly, says Fromlet.
How long the Strait of Hormuz in the Persian Gulf remains closed as a result of the war - normally around 20 percent of the world's oil and gas passes through it - is a decisive factor in the war's impact.
The longer the fighting goes on, the more energy infrastructure is destroyed. Then the more far-reaching effects you get. Even if the strait is reopened, it will take time for production to increase again, says Fromlet.
Nightmare for central banks
Stagflation - a situation where the economy stagnates and inflation rises - can force central banks to raise interest rates to curb inflation, even as it deepens the recession. Economists often describe it as a nightmare for central banks.
Yes, it really is. I think they also have what happened in 2022 in mind, and a lot of effort will probably be put into not repeating those mistakes,
Fromlet reminds us that the starting point for inflation is significantly better now than in 2022, when Russia launched its full-scale offensive war against Ukraine. This means that inflation increases do not need to be so dramatic or lead to a new interest-rate shock.
I won't rule it out. But I think central banks are more on their toes now.
