World Economy

Eurozone Corporate Earnings Dip

PMI for June fell to its lowest level in one and a half years.PMI for June fell to its lowest level in one and a half years.

The surge in earnings at European companies in 2017 is already starting to look like ancient history as economic conditions and a looming trade war choke off expansion. The enthusiasm over the economy is finally coming back after the financial crisis is already fading.

It’s looking more and more like the European Central Bank mistimed its move to tighten monetary policy with last month’s announcement it was ending asset purchases at the end of the year, Handelsblatt Global reported.

The ECB missed a chance to change course last year amid a booming European economy, which registered its highest growth in 10 years at 2.4%.

By the time the ECB gets around to raising interest rates in the second half of next year, economic growth will have long since evaporated. First-quarter growth this year was only 0.4%, just over half what it was in the previous three quarters.

More labor disputes, higher wage settlements, an unusually strong wave of influenza, rising oil prices, and higher euro rates in currency markets all contributed to the slower growth.

Along with US President Donald Trump’s aggressive trade policy, the gloomier economic environment has made companies more cautious.

IHS Markit’s purchasing managers index for June fell to its lowest level in one and a half years as manufacturing activity in the eurozone slowed. The index, considered a proxy for economic growth, has weakened each month since the beginning of the year.

The slowdown is disappointing after 2017 showed a 52% increase in earnings among the 500 biggest European firms by sales. Although it started from a low base, it was the strongest growth since 2010. The 69 German firms in the top 500 registered an average 89% growth in earnings. Europe-wide, the return on sales improved to 6.3% from 4.4%.

In the first quarter, however, earnings among the top 500 stagnated. The outlook for the year as a whole is no better, especially since Europe’s biggest economy is looking flabby. “German industry got a very weak start in the second quarter,” said Commerzbank economist Ralph Solveen.

Geopolitical turbulence is also weighing on the economy. Ernst & Young analyst Mathieu Meyer ticks off the trade dispute between Europe and the US, the risk of further escalation in the Middle East and the troubled relationship to Russia as threats to growth.

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