In addition to their regular forecasts, country panellists were asked to provide estimates of the growth of corporate profits in their respective economies between now and 2021. 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 panellists’ forecasts. Readers should note that the groups of survey respondents may be smaller than those listed on our main country forecast tables.
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 2016 issue of Consensus Forecasts.
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.
Spain:- Gross Corporate Profits (whole economy), before interest and taxation.
Peaks and troughs in corporate profitability tend to precede those of the business cycle, with profit growth rates often peaking early in an economic expansion and then easing again before the downswing is fully underway. This leading cyclical pattern is represented in the chart (right) which shows recent corporate profits growth and forecasts for the United States, Germany, the United Kingdom (excluding North Sea oil and gas revenues) and Canada, with all five traversing somewhat similar paths over the next 5 years. The US, German, French, UK, Canadian and Spanish series, as measured by the national accounts, are each based on a large sample of firms and are broadly comparable.
We also present, at the bottom of this page, quarterly forecasts for corporate profitability in the United States through Q2 2018. These are shown in current US dollars and in terms of annualized, quarter-on-quarter and year-on-year percentage changes. In line with the trend in GDP growth forecasts (see chart, below left), the US corporate profits cycle (defined in the national accounts as pre-tax corporate profits with inventory valuation and capital consumption adjustments) has progressively waned. Indeed, in 2015 profitability declined by -3.0%, and this year is expected to continue falling, by -2.1%. Export-oriented firms are being hard-hit by the strong US dollar relative to other currencies, while the weakness in commodity prices has taken a bite out of earnings among energy and raw materials producers (this is also evident in forecasts for Canadian and Norwegian profits). On a q-o-q annualized basis, US profits fell dramatically, by -22.3% in Q4 2015 on the back of slow global growth. Meanwhile, muted domestic fundamentals continued into the first half of 2016, so there was weak demand both abroad and at home. Our panel’s quarterly expectations suggest some clawback in q-o-q terms in Q3 and Q4 2016, but next year will be a relatively underwhelming one for profits, and the cycle is not expected to breach the modest annual 3% level until 2021. A weak yen and accommodative monetary policy by the Bank of Japan helped to support Japanese corporate profits in recent years. However, the yen has strengthened in the face of global financial volatility which has seen funds seek safe-haven currencies. Many Japanese exporting companies are facing a hit this year. There is little robust support coming from the domestic side. 2020 could well see another reduction in earnings on the back of a second possible consumption tax hike. UK profits may be reasonably resilient in the near-term but are drifting lower in 2018-19 as the Brexit scenario becomes clearer. German earnings appear solid, supported by stable economic growth.
A portion of the text from Consensus Forecasts, November 7, 2016.