Global recession seals real estate downturn In line with changes in our global economic view, we have made significant downgrades to our commercial real estate forecasts for the next couple of years. As a result, we now expect a much bigger drop in property values next year that will cause annual returns to be negative in all our key markets. In view of the wider interest, we are also sending this UK Commercial Property Update to clients of our US and Europe Commercial Property Services. 8th November 2022
Fracturing and financial flows The trend towards ever more “financial globalisation” has already decelerated and will probably slow further as the global economy fractures and policymakers favour resilience over efficiency. While a disorderly rupture of financial relations remains unlikely, links between the US and China will weaken. 6th October 2022
The signs of shifting cycles In recent weeks, attention has shifted from the likely size of rates hikes towards the timing of peaks and the prospect of ultimate cuts. History can tell us little about the likely profile since no two cycles have been quite the same. And central bank communications are not a reliable guide either – they have tended to warn of further tightening to come months after the peak has been reached in the past. Instead, we will have to monitor the incoming data very closely. Weakness in the housing market and signs of a let-up in underlying price pressures in Canada and the US, respectively, support our forecast that they will cut sooner and/or more aggressively than is typically assumed. 10th November 2022
Bonds may outperform equities amid a global recession After moving in broadly the same direction for much of 2022, we think that the returns from “safe” assets will generally diverge from those from “risky” assets between now and around the middle of next year. We suspect that long-dated government bond yields have peaked in most places and will fall back further as inflation eases and the global economy enters a recession. Meanwhile, we expect this to mean that most risky assets continue to struggle, despite lower “risk-free” interest rates. That said, we think that risky assets will generally rebound later on in 2023 and in 2024, as the global economy eventually turns a corner and government bond yields continue to edge lower. EM Drop-In (Thursday 3rd Nov): This 20-minute emerging markets briefing will take in our latest views on how the macroeconomic picture will inform EM financial markets, what Brazil’s election result means for the country’s economic outlook and our forecasts for Hungary’s forint and the Colombian peso. Register here. 1st November 2022
Early zero-COVID exit would hurt economy in 2023 A shift away from zero-COVID would be positive for China’s economy over the medium term. But the immediate disruption of reopening would probably exceed the cost of keeping the policy in place, especially if vaccine coverage among the elderly hadn’t risen substantially ahead of any shift. If China were to abandon zero-COVID now, that would warrant a lower not higher GDP forecast for next year. 10th November 2022
Broad-based decline in core inflation coming soon Despite the unanticipated strength in recent months, there are still good reasons to expect core inflation to fall markedly next year. That moderation will not require a deep recession and/or significant rise in the unemployment rate, although we do expect weak demand and easing labour market conditions to play a supporting role. Most of the coming decline in core inflation is already “baked into the cake” – private sector rent measures and other housing indicators point to a significant drop back in shelter cost inflation, while CPI medical care services will fall as the ridiculous spike in health insurance prices is reversed. The stronger dollar, easing supply shortages and collapse in transportation costs all but guarantee a slump in core goods inflation. We expect core CPI inflation to be below 2.5% by end-2023 and core PCE inflation to be around the 2% target. Both measures should fall below 2% in 2024. 2nd November 2022
Don’t miss the bigger picture in natural gas markets While front-month European natural gas prices have fallen sharply as concerns have eased around shortages this winter, longer-dated futures haven’t fallen by as much. That reflects how difficult it will be to fill storage without Russian gas flows next year. With global gas markets becoming increasingly integrated, this is likely to translate into higher US gas and LNG prices too. In view of the wider interest, we are also sending this Energy Update to clients of our Euro-zone service. 4th November 2022
Gold and silver prices to rise next year Gold and silver prices fell following Chair Powell’s hawkish comments yesterday. But if we are right in thinking US rates won’t rise by as much as markets expect, gold and silver prices should increase next year. We forecast prices to rise from $1,630 and $19 per ounce today to $1,700 and $19.5 by end 2023. 3rd November 2022
Recoveries still lagging in the major coastal markets Q2 data showed a mixed picture across the three sectors. For offices, the northern coastal markets continue to lag, with rent growth turning positive but still weaker than most other markets. Houston had an awful quarter for demand, and new supply in Seattle pushed vacancy up quickly there too. In the apartments sector demand slowed across the markets. Southern metros like Miami and Austin continue to see stronger demand, but there were also decent gains elsewhere, including Boston and D.C. And for industrial, there was a rebound in demand after a slow Q1, but it remains below the levels seen in H2 2021. Phoenix was the big winner here, continuing to benefit from extremely low vacancy in LA, Riverside and San Diego. But capital growth slowed notably in Q2 and we expect an even sharper slowdown in Q3 as cap rates face upward pressure. 24th August 2022
Will property be a problem again? The UK property market has a long history of either causing or worsening recessions. But that history has taught both banks and regulators a lesson. So while higher debt payments, falling property prices and a slump in construction will play a major role in dragging the economy into recession, we don’t expect the sector to trigger a banking crisis. Banks have far less exposure to commercial property today compared to the past, while more cautious lending practices have reduced the riskiness of mortgage debt and lenders have plentiful capital buffers to absorb losses. In view of the wider interest, we are also sending this UK Housing Market Update to clients of our UK Commercial Property and UK Economics Services. 19th October 2022
Australia & New Zealand Economics Update Multi-employer pay deals add upside risks to inflation The proposed multi-employer wage agreements risk further fuelling inflation by disruptive industrial action. And while employers could circumvent them by striking traditional enterprise agreements... 24th November 2022 · 3 mins read
Australia & New Zealand Economics Update RBNZ will probably lift rates to 5.5% The Reserve Bank of New Zealand hiked the overnight cash rate by 75bp as most had anticipated but signalled a much higher peak in the OCR than in August. We’re now forecasting another 75bp hike in... 23rd November 2022
Australia & New Zealand Economics Update Energy price caps could knock off 1%-pt from inflation The proposed price caps on thermal coal and natural gas would knock off around one to 1.25%-pts from overall inflation though the full impact would only materialise in the second half of next year. 8th November 2022
Australia & New Zealand Economics Update RBA to lift rates more sharply than most expect The Reserve Bank of Australia hiked rates by 25bp today and the upward revision to its inflation forecasts are consistent with our view that rates will peak at an above-consensus 3.85%. However, we... 1st November 2022
Australia & New Zealand Economics Update Budget repair will worsen economic slowdown The Treasurer resisted the temptation to spend the tax windfall from high commodity prices in today’s Budget. But with high inflation lifting payments by at least as much as receipts, the government... 25th October 2022
Australia & New Zealand Economics Update 5% peak in OCR will worsen housing downturn This publication has been resent due to an error with the previous email. The continued strength in inflation will encourage the Reserve Bank of New Zealand to hike the overnight cash rate by 75bp... 20th October 2022
Australia & New Zealand Economics Update Wealth effects pose downside risks to consumption Australia’s record housing downturn may not result in dwellings investment falling quite as sharply as we’re anticipating. However, the largest wealth destruction in Australia’s modern history poses... 17th October 2022
FX Markets Update We think the aussie and kiwi have a bit further to fall We expect the aussie and the kiwi to weaken further against the US dollar and trough around mid-2023. And while we don’t expect the aussie to outperform the kiwi as it has recently, we think it will... 12th October 2022
Australia & New Zealand Economics Update RBNZ will hike all the way to 4.5% The Reserve Bank of New Zealand hiked the overnight cash rate by 50bp to 3.5% as widely anticipated and the hawkish tone of the statement is consistent with our forecast that rates will peak at 4.5%... 5th October 2022
Australia & New Zealand Economics Update Looser policy on the cards before long The Reserve Bank of Australia slowed the pace of monetary tightening by delivering a smaller 25bp rate hike to 2.60% this month, but we still expect rates to peak a touch higher than most anticipate... 4th October 2022
Australia & New Zealand Economics Update RBA recapitalisation not off the table yet Despite incurring a record loss last year and now having to operate with negative equity, the RBA has not requested a recapitalisation from the government. But given that it did receive a capital... 21st September 2022
Australia & New Zealand Economics Update Aggressive tightening will be reversed next year The RBA lifted rates by 50bp today and dropped some hints that further tightening will be less aggressive. Even so, we still expect the Bank to hike rates more aggressively over coming months than... 6th September 2022
Australia & New Zealand Economics Update Chinese property slump not a huge headwind If the slump in China’s property sector continues for much longer, Australia’s export revenue would take a hit as iron ore prices tumble. But there are good reasons to think that the impact on... 24th August 2022
Australia & New Zealand Economics Update RBNZ will hike rates to 4% but cut next year The RBNZ lifted the overnight cash rate by 50bp to 3% today as everyone had anticipated and signaled that it will deliver another 50bp hike in October. We now expect the Bank to hike rates to a peak... 17th August 2022
Australia & New Zealand Economics Update Higher migration not enough to cool labour market An increase in the permanent migration programme will help to alleviate labour shortages. But the rapid tightening of the labour market in recent months has been driven by strong labour demand rather... 16th August 2022
Australia & New Zealand Economics Update The implications of an escalating Taiwan crisis The extent to which neighbouring countries would be affected by an escalation of tensions between China and Taiwan would depend both on which sides they take and on the nature of restrictions imposed... 10th August 2022
