A survey released on Monday indicated that growth in the Eurozone's manufacturing sector slowed in May, as demand for goods stalled and supply chain disruptions stemming from the Middle East conflict drove input costs to their highest level in four years.

The S&P Global Eurozone Manufacturing Purchasing Managers' Index (PMI) fell to 51.6 in May from 52.2 in April, which was near a four-year high. However, the final reading exceeded the preliminary estimate of 51.4. A PMI reading above 50.0 signals expansion in factory activity.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted, "Although Eurozone manufacturers reported a fourth consecutive month of expanding activity in May, signs are emerging that the sector is struggling under the weight of rising prices and supply disruptions caused by the Middle East conflict."

New orders stagnated in May, marking a sharp contrast to April, when demand—a key gauge of the sector's health—recorded its fastest growth in four years, partly due to consumers bringing forward purchases.

The decline in export orders further contributed to the overall weakening of demand.

Factory output continued to expand, but the growth rate decelerated to its slowest pace since January. The output index dropped to a four-month low of 51.3 in May, down from 52.3 in April.

Employment levels have now declined for three consecutive years.

Manufacturers remained optimistic about the year ahead, although confidence levels stayed below the long-term average.

On the price front, input costs rose at their fastest annual pace since May 2022, driven by surging energy and raw material prices.

Firms passed on part of this burden to customers by raising their selling prices at the quickest rate in three and a half years.

"Factories have been forced to pass higher costs on to customers, which will inevitably push inflation higher in the coming months. However, elevated prices are dampening demand, with new orders stagnating in May after three months of improvement," Williamson added.

Supply chain delays worsened to the most severe level since June 2022, adding further upward pressure on costs.

Policymakers face a difficult balancing act. The survey suggests that while there is a desire to curb resurgent inflationary pressures, weak demand implies that aggressive interest rate hikes carry significant risks.

A poll of economists conducted in May indicated expectations that the European Central Bank would raise its deposit rate this month and implement at least one more hike this year in an effort to prevent energy price increases from feeding into core inflation.

Inflation last month is projected to have risen further above the ECB's 2% target.