UNTIL European politicians deliver a measure of stability, it's difficult for investors to concentrate on equity valuations. Italy's recent leadership change is just one reason for investors to stay on the sidelines.

Last week we ran through the performance of European and US equity markets so far in 2011, highlighting how expectations for earnings growth for this year and the next have steadily fallen.

This week we give a bit more detail on where we believe 2012 estimates will settle. Growth forecasts for the underlying European economy have been falling throughout the year.

This is essentially due to the ongoing game of high stakes brinkmanship in the EU with the European Central Bank, Germany and France all trying to exert as much pressure as possible on southern Europe to deliver extreme degrees of fiscal consolidation while also delivering economic liberalisation to generate future growth.

The more measures taken to balance budgets in the medium term, and the more structural reform there is to liberalise labour markets, the more pressure will be put on European macro growth.

Our colleagues at Barclays Capital have recently reduced their forecasts for 2012 euro area GDP to just 0.4% (from 0.9% previously).

How does this translate into corporate earnings?

The corporate sector in Europe does enjoy a broad geographic footprint, particularly sectors like healthcare, basic resources, industrials, oil and gas.

Given our more positive economic view on the world outside Europe (current estimates are for 6.6% nominal global GDP growth), we expect the European corporate sector to generate stronger sales growth than the underlying euro area. Even if economic growth does turn negative in the euro area, the level of overseas revenues may allow the corporate sector to still register positive top line growth.

In terms of margins, we expect input cost pressures to ease considerably in the coming year. In retail for example, cotton futures have fallen 55% since their March 2011 peak, which is likely to support margins in the sector.

Elsewhere, the CRB raw materials index has declined more than 16% from its April peak. All these inputs tend to have a lagged impact on corporates, so the input price reset may only hit in 2012.

More importantly, domestic wage growth trends are also likely to remain similarly subdued.

These factors should ensure whatever top line growth we do get next year actually translates into earnings growth.

:: Andrew Miller is regional office head at Barclays Wealth in Newcastle