Eurozone: Profits turn the corner

For years the economic picture in the eurozone has been characterized by weak growth, low increases in productivity and a gradual upcreep in unit wage costs. This doubtless had a negative impact on companies' profits. In its Economic Bulletin (Issue 1/2015) the ECB demonstrated that profit margins for non-financial corporations fell dramatically during the 2008/9 recession, and have also decreased over the past two years. During these periods, gross operating surplus dropped more sharply than real value added. Increases in labor and capital costs per unit produced could not be passed on to selling prices. However –  as the ECB rightly points out – profit margins had risen sharply before the 2008 crisis, making it difficult to estimate appropriate reference values.

Despite shrinking profit margins over the past two years, European stock markets have been going from strength to strength. Sceptics view this as the real economy and financial markets drifting apart under the influence of a flood of liquidity from central banks, investors' hunts for yield faced with a zero interest rate policy and disrupted monetary policy transmission channels to the real economy. But does this really explain why European stock markets are booming? In this context, it is important to remember that many European markets are still well below previous levels. Despite the recent climb, the EuroStoxx50 is still around 25% off the highs reached in 2007/8. Stock indices were even harder hit than overall earnings during the crisis. As a result, the price/earnings ratio of European indices is anything but above-average. In addition, companies represented on these indices often operate on a very international plane, and carry out a substantial part of their business outside the eurozone with its weak growth.

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