2023-07-19 04:44:46
Inflation is slowing in Europe but if we exclude energy prices, it persists, pushing the central bank to maintain a restrictive monetary policy longer than hoped.
After two years of record profits, European companies, which are preparing to publish their second quarter results, are facing the test of the slowing economy. “The results (at the end of July) will be worse than in the second quarter of last year, we expect a decline in both turnover and profits,” said Alexandre Baradez, analyst at the brokerage firm IG France.
The atmosphere was still festive at the end of the first quarter, “the companies then displayed a pleasant start to the year”, he underlines. The data then helped to push companies: the first signs of economic recovery in China were appearing, energy prices had largely fallen and growth in the economies of the euro zone was revised upwards. Equities then followed, the pan-European Stoxx 600 index, for example, gained more than 8% since January 1, despite efforts by central banks to slow the economy in order to bring inflation down.
Consumption is falling
It is thus a rather encouraging landscape which served as the basis for the projections of the companies – the “guidances” in the financial jargon – at the beginning of the year. However, throughout the second quarter, analysts downgraded earnings per share expectations as the sky darkened on the macro front.
At the end of the first half of the year, growth in China resumed more slowly than expected and support measures from the Chinese government are still awaited. Inflation is slowing in Europe and the United States, but if we exclude energy prices, it persists, pushing central banks to maintain restrictive monetary policies longer than expected. In addition, consumption has been running out of steam overall in Europe since the start of the year.
Sign of this weakening, “companies have less accentuated the pressure on prices in recent months, which shows that the consumer can no longer follow”, explains Alexandre Baradez. Admittedly, the job market remains solid and “the consumer is not exhausted either, but the fat cow period is no longer possible”, adds the analyst from IG France.
“We are facing a two-speed economy and it is very difficult this year to establish estimates,” explains Oliver Collin, European equity manager at Invesco.
The biggest drops in the energy sector
At the time of the half-year accounts, some sectors should do better than others, services better than industry, for example. On the European Stoxx 600 stock index, where cumulative corporate profits are down 6% for the whole year excluding the financial sector, the biggest falls are expected in the energy sector. In this last area, the fall promises to be severe. “On the American market, analysts estimate that the (energy) sector will mark a decline of 47-48% and we will have the same dynamics in Europe”, according to Alexandre Baradez, even though this sector represents “4 to 5% of the ‘European index’.
But beyond the simple results to come, “one wonders how companies will project themselves for the rest of the year”, adds the analyst. Over the full year, forecasts Oliver Collin, “earnings in Europe will oscillate between balance and slight decline”, and the 2023 vintage is not expected to surpass that of 2022.
1689742926
#European #companies #face #challenge #economic #slowdown
