Manufacturing activity across the euro zone lost its upward momentum in May, as a combination of stagnant demand and supply chain bottlenecks began to weigh on the sector. While the S&P Global Manufacturing PMI remained in growth territory at 51.6, it retreated from April’s four-year high. Experts point to regional conflicts in the Middle East as a primary driver for these disruptions, which have forced input costs to their highest level in four years and hindered the momentum the industry had seen earlier in the spring.

The current climate has created a difficult dilemma for policymakers at the European Central Bank. As factories struggle with stalled order books and declining exports, they are increasingly forced to pass surging energy and raw material costs onto consumers, threatening to push inflation higher. With employment figures remaining sluggish and overall business confidence sitting below historical averages, the ECB must tread carefully; while they are expected to hike interest rates to combat rising inflation, aggressive tightening could inadvertently stifle the already fragile demand that is vital for the region's economic recovery.