Weekly Update - Euro area: industry and services are not experiencing the same crisis, for now

The sharp rise in energy prices, in the context of the continued blockage of the Strait of Hormuz, is already having an effect on euro area activity data in Q2 26, but with differentiated impacts across sectors. Indeed, while, as expected, goods prices have increased, industrial activity data remain resilient, supported by restocking and stimulus plans. In the services sector, although less directly exposed to the energy crisis, price increases remain contained, while activity data show a more marked slowdown. The ECB should increase its key rate in June in the face of inflationary risks, but remain attentive to risks to growth.

Inflationary pressures that will continue in the euro area.
Survey data for Q2 26 are beginning to highlight the effects of the energy crisis linked to the prolongation of the blockage of the Strait of Hormuz. The most visible effect at this stage is the acceleration of inflation, to 3% in April for headline inflation in the euro area and to 2.22% for core inflation. Surveys for the month of May indicate that inflationary pressures should continue over the coming months. Indeed, price increase expectations in the industrial sector have continued to rise, reaching their highest level since 2022, reflecting higher energy prices but also increasing disruptions to value chains. In the services sector, surveys show that inflation expectations are increasing only moderately in May. Overall, this would remain consistent with an inflation services close to 3%, it’s average level since the Covid crisis.

Industrial activity that is holding up and services activity that is suffering.
In line with inflation expectations, activity survey data for May highlight a divergence between industry and services. Indeed, although being on the front line of the energy shock, the industrial sector shows survey results suggesting still resilient activity. The observed activity component continues to increase, in parallel with the new orders sub-component, notably reflecting the restocking process by companies anticipating possible shortages or a future rise in energy prices, in a context of a prolonged conflict in the Middle East. The resilience of the industrial sector is also explained by European stimulus plans, particularly focused on infrastructure and defense. Conversely, the services sector shows greater fragility since the beginning of the conflict, with surveys suggesting a slowdown in activity over recent months, accompanied by also deteriorated prospects. This slowdown illustrates European consumption that remains subdued in the main economies, while the energy crisis erodes household purchasing power.

A rate hike cycle that would begin in June and remain limited.
In this context, several ECB members have suggested that it is likely that the institution will increase its interest rates at the June 11 meeting. Isabel Schnabel, member of the ECB Executive Board, notably stated that a “rate hike in June will be necessary”, given the inflationary pressures mentioned above and the risk of a wage price loop. Markets therefore anticipate a tightening cycle of 2 to 3 rate hikes by the end of the year. However, given the weakness of activity in services and the absence of significant inflationary pressures beyond energy, we estimate that the ECB tightening cycle should remain limited.

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