Revisions by equity analysts to their forecasts for company earnings suggest that the world economy is very weak but not yet in recession, while Euroland is underperforming, as predicted by relative monetary trends.
Analysts adjust their forecasts in response to company-level news so earnings revisions should provide indication of current economic momentum. The “revisions ratio” – upgrades minus downgrades expressed as a proportion of the number of estimates – correlates PMI manufacturing new orders, though is more timely and available for a wider range of countries.
The developed-markets revisions ratio fell sharply in August, suggesting that G7 PMI new orders will have moved further below the break-even 50 level – see first chart. At -0.10, however, the ratio remains above the -0.13 level historically associated with global recessions. (The corresponding level of PMI new orders is 45.)
A regional breakdown shows that Euroland has plunged beneath the critical level but the US, Japan and UK remain comfortably above it – second chart. Eurozone equity investors pursuing a strategy of “hiding in the core” have suffered a rude awakening as analysts have taken an axe to their German and French earnings estimates – third chart. Core weakness was signalled by a contraction of real M1 deposits this spring, even as the ECB was playing Russian roulette with interest rates.
