In a post last week I explained that the G7 economic downswing is now a year old and at the critical point that has divided “soft” and “hard” landings historically – see first chart below. I still think a “hard” landing can be avoided, although recent further credit market turmoil and rises in energy costs have obviously increased downside risks.

The chart also shows the developed-markets “revisions ratio” – the net proportion of equity analysts’ company earnings forecasts that are upgraded each month. The revisions ratio is a good coincident indicator of the G7 industrial cycle and is published on a timely basis, with November figures released this week. Unsurprisingly, the ratio is now in negative territory – more forecasts are being downgraded than upgraded – but its level is currently still consistent with a “soft” landing. Further weakness is likely but the ratio needs to fall to -0.10 (i.e. a net 10% of all forecasts cut) to ring “hard” landing alarm bells.

I have argued that the consensus is too fixated with US recession talk and is underplaying downside risks in Europe. This theme receives support from regional revisions ratios, showing notable weakness in continental Europe (and Japan) in the latest month – see following chart. The ECB has been slow to acknowledge a deteriorating outlook but I think policy-makers will soften their stance at the December meeting and signal a possible rate cut in early 2008. This could take some of the steam out of the euro.