CORPORATE PROFITS GROWTH

In addition to the regular forecasts which we receive each month for the G-7 countries, we also undertake special surveys of corporate profits twice a year over a 5-year horizon in our Consensus Forecasts™ publication. As is our usual practice, the data is measured as the average percentage change over the previous calendar year. Not surprisingly, the individual profits definitions differ according to local custom and data availability. However, following discussions with forecasters from our country panels, the definitions outlined below were considered as the most widely accepted economic measures of corporate profitability. The resulting Consensus Forecasts™ represent mean averages of the panelists' forecasts.

Our surveys for Corporate Profits cover each of the countries listed below, and are conducted twice a year in May and November. The table and text commentary below represents a portion only of this special survey taken from our November 2011 issue of Consensus Forecasts. To view a sample issue of Consensus Forecasts please click the "Download Sample Issues" button below.

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Definitions (all in nominal terms and all on a national accounts basis except Japan and Norway)

United States:- Pre-tax Corporate Profits with capital consumption and inventory valuation adjustment, i.e. after allowance for depreciation and for the impact of inflation on inventories.

Japan:- Pre-tax Corporate Recurring Profits with capital consumption and inventory valuation adjustment, all industries excluding financial and insurance.

Germany:- Gross Entrepreneurial and Property Income, excludes all wage and salary income but includes that from interest and dividends.

United Kingdom:- Private Non-Financial Corporate Trading Profits, i.e. income (excluding North sea oil and gas activities) before tax, excluding all income of overseas subsidiaries and before allowance for capital depreciation but net of stock appreciation.

Canada:- Pre-tax Corporate Profits, excluding interest and investment income and before allowance for either the impact of inflation on inventories or capital depreciation.

Sweden:- Gross Corporate Profits (mining and manufacturing companies), before interest and taxation.

Peaks and troughs in corporate profitability (% change) tend to precede those of the business cycle, with profits growth often peaking early in an economic expansion and then easing again before the downswing is fully underway. This leading cyclical pattern has been demonstrated in recent corporate profits growth for the United States and the United Kingdom (the latter excluding North Sea oil and gas revenues), both having seen declines last year. The US, UK and Canadian series, as measured by the national accounts, are based on a large sample of firms and are broadly comparable.

We have also included quarterly forecasts for corporate profitability in the United States through to the second quarter of 2013. As illustrated in the box below, these are shown in current US dollars and in terms of annualized, quarter-on-quarter and year-on-year percentage changes. Having recorded strong annualized and quarterly growth in 2010, corporate profits have continued to grow in the US as 2011 has progressed. Firms have benefited from cost-cutting efficiency gains and increased emerging market demand. Falling demand from the Euro zone resulting from the recent escalation in the sovereign debt crisis is likely to weigh on corporate profit growth, however, as well as coinciding with a decline in export revenues to US firms. Weaker Euro zone activity means that our US corporate profit forecasts for 2012 have been downgraded from our previous profits survey in May 2011 while over the rest of the forecast horizon, double-digit growth is not expected to recur. Meanwhile, in Canada, strong commodity prices made a sizeable contribution to corporate profits in 2010, which grew by 21.2%. Canadian companies can expect further strong growth in profits this year, with firms benefiting from healthy US demand for exports. Japan is likely to buck the trend in slow corporate profit growth in 2012, as companies benefit from rebuilding efforts in the wake of the earthquake/tsunami/nuclear disaster in March this year which depressed earnings. This effect is only expected to be temporary, though, with medium-term profitability at much more muted levels.

The uncertainty surrounding the current Euro zone debt crisis has seen a dramatic reduction in expected corporate profit gains across Western Europe. In particular, Germany has seen its 2011 profits forecast drop from 6.4% in May to just 1.5%. This is partly due to a slowdown in exports as consumers in the Euro zone delay expenditure amid financial and economic upheaval. Exposure to toxic bank assets from the hard-hit periphery is not helping corporate earnings forecasts, either. French expectations are also muted, with companies likely to struggle following the passage of further austerity measures. By contrast Sweden recorded a strong recovery in corporate profits in 2010 and is set to follow up with growth of 11.5% this year, although this will be followed by a period of retrenchment as global economic uncertainty erodes profit margins. The exception to the downward trend is Spain which has seen forecasted corporate profits for 2011 rise to 3.8% following expectations of 1.7% in May, though the improvement is due to a very low base. Italian firms can expect few gains in earnings next year as low productivity, combined with government austerity and market uncertainty, restricts earnings growth.

A portion of the text from Consensus Forecasts, November 14, 2011

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