Weekly Economic Briefing

Diverging corporate fortunes

22 July 2014

Global Overview

  • The profits of European businesses have lagged behind their American counterparts in recent years. Turning around this dismal relative performance requires accelerating economic reforms as well as looser policy to stimulate domestic demand.
  • The national accounts measure of US corporate profits fell substantially in Q1, however the causes look temporary and we expect earnings to rebound this quarter. Subdued profits in the Euro-zone are likely to prove more stubborn.
  • UK national accounts data shows improvements in both corporate profits and employee compensation, which should ease investor concerns that interest rate rises will derail the recovery.
  • By cutting corporate tax rates, Abe is hoping to incentivise Japanese corporates to stop hoarding cash and start investing.
  • China’s approach to GDP accounting differs from the rest of the world, and is not always the most believable. Although the picture looks positive, is this enough to assuage investors’ long-term fears?
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US

Gross Domestic Income fell for the first time since 2009 in Q1, dragged down by corporate profits. This looks like a one-off, the rest of the year should see better income and earnings numbers.

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UK

Profits in the UK corporate sector have picked up strongly alongside an economic recovery. With the profit share well below pre-crisis levels, there looks to be scope for further improvements ahead.

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Europe

Corporate profits in the Euro-zone are rising again, albeit slowly. However, this recovery will have to contend with a sluggish pick-up in demand and a weak inflationary environment.

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Japan

Corporate tax reform has been placed at the heart of Abe’s growth strategy. How effective will such a move be in boosting growth?

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Emerging Markets

China’s problems continue to mount but the current mix of policy settings appear to be helping to stave off any near-term crisis.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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