Following the continuous decline in the manufacturing industry, the service sector indicators in the Eurozone have recently shown a significant downturn, with economic growth showing signs of fatigue. At the same time, the Eurozone's inflation rate has rebounded beyond expectations. Amidst weak economic growth and the impact of U.S. tariff policies, the risk of stagflation is not far from the Eurozone.

On November 22, S&P Global and the Hamburg Commercial Bank released the latest survey data, showing that the preliminary value of the Eurozone's Services PMI for November was 49.2, far below the level of the previous month (51.6) and the market's expected median (51.8). Meanwhile, the preliminary value of the Manufacturing PMI for November was 45.2, a further decline from 46 in the previous month. The Eurozone's composite PMI fell nearly 2 points from the previous month to 48.1, the lowest in 10 months. The PMI indicators for Germany and France, the "engines" of the Eurozone economy, have significantly deteriorated. As a result, the euro exchange rate against the U.S. dollar fell sharply that day and expectations for further interest rate cuts by the European Central Bank rose rapidly.

Inflation indicators have also fluctuated. On November 19, the EU's statistical office released the second estimate showing that the Eurozone's inflation rate in October, calculated on an annual basis, was 2%, a rebound beyond expectations from 1.7% in September. At the same time, the inflation rate rebounded in 19 of the 27 EU member states.

Some analysts have pointed out that while economic activity is declining across the board, the speed of price increases is accelerating, indicating that "the Eurozone is in a stagflationary environment." Cyrus de La Rubia, the chief economist at the Hamburg Commercial Bank, said, "The unexpected sharp decline in the Eurozone's service sector in November means that the hope for lower inflation rates and higher wages to stimulate consumer demand has been shattered."

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In the face of changes in inflation data, the European Central Bank's policymakers are trying to convince the market that the situation is still under control. François Villeroy de Galhau, a member of the ECB's governing council and the governor of the Bank of France, said on November 22 that the ECB is "very confident" that it will sustainably achieve a 2% inflation target, even earlier than predicted in September.

However, achieving the inflation target and ensuring stable economic growth is not easy.

On the one hand, the continuous decline in the Eurozone's manufacturing industry is dragging down its competitiveness and affecting the labor market. In this situation, the decline in inflation is accompanied by weak consumption, and a slow recovery in residents' purchasing power and consumer confidence, which can easily lead to a reduction in domestic demand and insufficient economic growth momentum.

On the other hand, measures to stimulate domestic demand, promote wage growth, and increase service costs make core inflation difficult to decrease or even rebound. This rebound in inflation is closely related to the rise in wages in the Eurozone in the third quarter. In addition, with the increasing debt levels and high budget deficits in some Eurozone countries, coupled with weak long-term growth prospects and policy uncertainty, it is easy to increase the sovereign debt risks of some member states. The ECB's latest financial stability assessment report released on November 20 shows that against the backdrop of increasing geopolitical uncertainty and poor economic performance, the sovereign debt risks of Eurozone countries are rising, which may threaten financial stability.

From an external shock perspective, the strong interest of the new U.S. administration in trade restriction measures such as increased tariffs during the election campaign has also made Europe uneasy. According to the EU's assessment, the implementation of such policies may weaken Europe's exports to the U.S., affect the Eurozone's manufacturing industry through supply chain disruptions and rising costs, and once again push up imported inflation, bringing a heavy burden to business operations and people's lives, thereby limiting the policy room for maneuver of the European Central Bank.

In the European Economic Autumn Outlook report released by the EU on November 15, the economic growth forecast for the Eurozone in 2025 has been revised down from 1.4% to 1.3%, reflecting the increased uncertainties and risks it faces due to geopolitical tensions and the rise of protectionism in trade partner countries. In this situation, the Eurozone needs to focus on strengthening policy coordination and increasing internal momentum to pave the way for long-term economic growth.