Things aren’t as bad in Europe as many believe. It looks as if the continent is finally pulling itself out of the economic slump that has engulfed the region since the financial crisis.
Data out today showed the euro area economy continued to hold its growth momentum in August. A composite Purchasing Managers Index for the 19-nation region posted its strongest expansion in seven months. Meanwhile, earlier in August the second estimate of GDP across the Eurozone confirmed that growth for the quarter was 0.3%, down from the 0.6% reported in the first three months of the year but still a positive reading. Germany, Europe’s largest economy expanded by 0.4%, down from 0.7% in the first quarter but above forecasts of 0.2%.
European corporates also appear to be staging a small recovery, beating earnings expectations for the second quarter.
European earnings: Staging a comeback
For the second quarter, European companies in the leading Stoxx 600 index reported a 14.6% year-on-year decline in earnings per share, which is hardly anything to get excited about but it did beat the consensus. Analysts were expecting a 22% drop.
On a sector-by-sector level, the picture looks even more impressive. Of the ten major European sectors, eight beat consensus in the last quarter. The only sectors that lagged behind were Energy and Tech, both of which failed to meet expectations.
The second quarter in a row Energy and Financials were the largest drag on earnings per share. In fact, if you strip out these two sectors from the earnings calculation Stoxx 600 EPS growth for the quarter was positive at +1.4%. The percentage of companies that beat expectations was 19%, well above the long-term average of 11%.
Looking ahead analysts at Deutsche Bank expect earnings to improve further, although much of the improvement will come from UK revisions. A 12% depreciation in sterling since June 23 will drive a 5% upside to 12-month forward earnings projections. Stripping out any positive impacts from sterling and the UK, Deutsche’s analysts are somewhat bearish on European earnings over the coming quarters. The banks UK 2016 EPS growth target is 8%, 14.1% higher than consensus. The current consensus expectation is for UK EPS growth to average -6.1%.
European second-quarter earnings figures are broadly positive, relative to low expectations. A pessimist would say that the numbers are downright terrible especially when looking at sales and capex figures compared to historic averages.
Deutsche Bank has compiled the data going back eight years and compared to historic averages it is painfully apparent how badly European corporates are currently faring. The eight-year average growth in sales for the Stoxx 600 is 1% per annum. For the second quarter, sale contracted by 4%. Moreover, the eight-year average for annual capex spending growth stands at 1%, in line with sales but for the last quarter capital spending fell by 5%.
Europe is recovering, but there’s still a long way to go before policymakers can claim their mission has been accomplished.