The latest reassessment by equity analysts of the outlook for Eurozone company earnings suggests that it is now too late for the region to avoid a recession.
The “revisions ratio” – the number of analyst upgrades to earnings minus downgrades expressed as a proportion of all estimates – correlates with the Eurozone manufacturing purchasing managers’ new orders index but is available on a more timely basis. The ratio has plunged further in September, suggesting a fall in PMI new orders to below the 45 level indicative of a whole-economy recession – the “flash” PMI survey is released tomorrow.
The slump in activity was foreshadowed by a contraction in Eurozone real narrow money, M1, discussed in a post in December and several subsequent updates.
As also predicted by monetary trends, economic weakness has spread from the periphery to the core, reflected in large earnings downgrades in France and Germany – second chart.
The disastrous decision by the ECB to tighten policy while real money was contracting has exacerbated current woes. Departing chief economist Juergen Stark bears significant responsibility for this blunder – stronger grounds, arguably, for his resignation than the suggested reason of opposition to Italian and Spanish bond purchases.
The ECB must now ease aggressively, slashing rates and continuing to buy bonds, though with the aim of injecting liquidity rather than providing fiscal support to the periphery – this argues for spreading purchases across Eurozone markets in proportion to economic size.
Globally, Eurozone weakness could yet be offset by stronger US growth in response to recent faster monetary expansion, discussed in yesterday’s post.
