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 Weekly New Zealand will enter prolonged recession We already predicted that New Zealand would enter recession a month ago and the RBNZ’s determination to push the economy off a cliff to get inflation under control means the downturn will be even... 25th November 2022 · 7 mins read
Australia & New Zealand Economics Weekly Wage growth still not a major driver of price pressures Even though wage growth surpassed 3% for the first time since 2012 last quarter, and unemployment is back at a record low, the tight labour market has not been a major... 18th November 2022
Australia & New Zealand Economics Weekly Hawkish RBA will continue to tighten well into 2023 The RBA Deputy Governor this week noted that the Bank is getting closer to the point where it can stop tightening, which creates some downside risks to our above-consensus interest rate forecasts... 11th November 2022
Australia & New Zealand Economics Weekly Hawkish RBA will continue to tighten well into 2023 The RBA didn’t respond to the upside surprise in Q3 inflation with a renewed 50bp hike this week as some had anticipated. But by revising up its inflation forecasts and sounding increasingly concerned... 4th November 2022
Australia & New Zealand Economics Weekly RBA will stick to 25bp hike One reason why investors were caught off guard by the further acceleration in trimmed mean CPI last quarter was that the ABS' Monthly CPI Indicator hasn't been as reliable as we'd like it to be. That... 28th October 2022
Australia & New Zealand Economics Weekly RBA prepares investors for a lengthy tightening cycle The Reserve Bank of Australia signaled this week that its decision to slow the pace of tightening at its latest meeting doesn't mean that the tightening cycle will be over soon. Meanwhile, Treasurer... 21st October 2022
Australia & New Zealand Economics Weekly RBA still likely to lift rates to 3.6% by mid-2023 The RBA downplayed the importance of its revised estimate of the neutral interest rate published this week. For what it’s worth though, the Bank’s analysis implies that the cash rate remains below... 14th October 2022
Australia & New Zealand Economics Weekly RBA still likely to lift rates to 3.6% by mid-2023 The Reserve Bank of Australia hiked rates by less than most had anticipated this week, but with the economy still running red hot, we doubt that it will take its foot of the brake altogether before... 7th October 2022
Australia & New Zealand Economics Weekly Early signs that households are coming under pressure With commodity prices surging in the wake of the Ukraine war, the final budget outcome for 2021/22 improved the most relative to the Budget forecast in history. And with coal prices still sky high... 30th September 2022
Australia & New Zealand Economics Weekly Turning point for inflation has been reached While the exchange rate has only played a minor role in the surge in “core” goods inflation to a record-high, the further depreciation of the Australian dollar over the past month will tilt the... 23rd September 2022
Australia & New Zealand Economics Weekly RBA will deliver another 50bp rate hike RBA Governor Lowe reiterated today that the Bank will slow the pace of tightening at some point. But his hawkish comments on the health of consumer spending and the labour market suggest that this... 16th September 2022
Australia & New Zealand Economics Weekly RBA will slow pace of tightening to 25bp next month Consumption has recovered faster than we had expected. However, income growth has disappointed and the savings rate is falling more sharply than we had thought. That leaves less scope for households... 9th September 2022
Australia & New Zealand Economics Weekly Housing downturn starting to weigh on activity While the plunge in homebuilding last quarter reflected supply shortages more than weak demand, slumping home sales and house prices suggest that the downturn in dwellings investment has much further... 2nd September 2022
Australia & New Zealand Economics Weekly Resilient activity points to aggressive RBA tightening While business surveys in other advanced economies point to shrinking activity, the are holding up much better in Australia. The resilience of Australia's consumer reflects the strongest rise in... 26th August 2022
Australia & New Zealand Economics Weekly Wage growth will surpass 3% next quarter While there are some early signs that the recovery in employment is sputtering, we aren't convinced that the labour market has turned for the worse just yet. With labour shortages still severe and the... 19th August 2022
Australia & New Zealand Economics Weekly RBA to slow pace of tightening from October The latest survey data suggest that inflation will continue to accelerate over coming months and we expect the Reserve Bank of Australia to deliver another 50bp rate hike next month. But with food... 12th August 2022
