Euro-zone

Belgium

Rising Covid fears will keep policymakers dovish

It is too early to judge how serious the B.1.1.529 variant will turn out to be, but it certainly reinforces the case for central banks to be ultra-cautious when withdrawing their policy support. We now think that at its next meeting, the ECB will make clear that even if it intends to end net PEPP purchases in March, it stands ready to start them again if needed. That in turn should help to keep bond yields and spreads low. Meanwhile, we are braced for some “shock” inflation numbers next week, but they should mark the peak and inflation is likely to fall quite sharply next year.

26 November 2021

Rental recovery picks up pace

The recovery in euro-zone commercial property values picked up in Q3, supported by a small fall in yields and an improvement in the pace of rental growth. While retail rents held steady, the quarterly rise in both office and industrial rents was the largest since 2019 Q4. Demand for prime assets and low interest rates will continue to support the property sector. However, with economic activity expected to slow over the next six months or so, and the outlook for the retail and office sectors still clouded by structural change, we think that the property recovery will struggle to maintain its current pace.

16 November 2021

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

7 October 2021
More Publications

Sector fortunes to shift

While the Delta variant has slowed economic activity in other parts of the world, this has not yet been the case in the euro-zone, and we are cautiously optimistic that the bloc will continue to grow. This will support the property market upturn, albeit offices and retail face structural challenges that will limit the rental recovery. Stronger rental prospects for industrial mean we think that the sector has the most scope for yield compression in the near term, though strong demand for prime assets should allow office yields to edge a bit lower too. However, further increases in yields will make some retail assets look increasingly attractive by year-end, prompting small yield falls in the next few years. The upshot is that industrial is expected to outperform over the next couple of years, but stronger capital value growth beyond 2022 will result in retail returns emerging as the strongest.

Prime Brussels offices to fare better than most

More remote working is pushing all occupiers to reassess their office space, but we think that rental growth for prime offices in Brussels should hold up better than the wider market.

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

Drop back in bond yields takes pressure off ECB

The fall in sovereign bond yields over the past week may make things a little easier for the ECB Governing Council when it meets on 10th June. We think it is likely to replace its commitment to make “significantly” higher bond purchases than in Q1 with a less specific commitment to keep financing conditions favourable. Next week we expect to learn that inflation got very close to 2% in May (data on Tuesday) while the final PMIs for May will show a big improvement in Spain and Italy (Thursday). Retail sales data for April (Friday) will probably fall in m/m terms as a lot of shops were closed in France. Finally, note that the Capital Economics London “office” will be closed on Monday.

EC Survey (Apr.) and Euro-zone Bank Lending (Mar.)

The largest-ever slump in the EC Economic Sentiment Indicator in April comes as no surprise but, along with the 3.9% q/q fall in Belgian GDP in Q1, it underlines the depth of the euro-zone’s recession.

1 to 8 of 48 publications
See More ↓