Euro-zone

Spain

Inflation falling but rates may rise to zero

We expect consumption to rebound from the Omicron wave within a few weeks, lifting euro-zone GDP to its pre-pandemic level in the first half of the year. But GDP will remain below its pre-pandemic path for the foreseeable future. Meanwhile, more stable energy prices will cause headline inflation to come down sharply, but the lingering effects of the pandemic will prolong supply-chain problems and wage inflation is likely to rise. As a result core inflation will stay above the ECB’s 2% inflation target throughout 2022. And against that backdrop, the ECB will end its net asset purchases by December and prepare the ground to raise its deposit rate to zero by the end of 2023.

21 January 2022

Omicron uncertainty weighs on activity in Q4

This week brought more bad news for the euro-zone economy, with the surge in cases and spread of the Omicron variant casting a shadow over services sector activity. While recent restrictions have brought down cases in Germany and Austria, there is a clear risk that this goes into reverse in the coming weeks and that consumers become more cautious. Against this more uncertain backdrop, while we expect the ECB to announce next week that it will end its PEPP purchases in March, it will also say it is prepared to be more flexible in future.

10 December 2021

Omicron poses near-term downside risk to property recovery

The near-term economic outlook has weakened, with the Omicron variant posing further downside risk. Meanwhile, inflation is likely to be higher for longer. However, we expect it to fall back by 2023, allowing interest rates to remain low. This backdrop will support the property upturn, but with the outlook for office and retail still clouded by structural change, it is likely to continue at a slower pace than in 2021. Overall, we think industrial will keep its place at the top of the returns’ rankings in 2022. But, after a period of underperformance, retail is expected to be the winner on average over the 2022-26 period.

9 December 2021
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Valuations worsen, but office and retail still fair value

Higher alternative asset yields and falls in office and industrial yields contributed to a further deterioration in property valuations in Q3. The decline in government bond yields since then, which has been reinforced by concerns about the new virus variant, could provide some reprieve in Q4. But looking further ahead we expect government bond yields to rise again and weigh on property valuations. Nevertheless, with the gap to government bond yields still wide, we don’t think this will result in upward pressure on property yields until after 2023. As such, we think there is still scope for property yields to fall before then, not only in the industrial sector where the outlook for rental growth is solid, but also for retail as valuations are supportive and rental prospects have improved.

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.

Taking stock of the European natural gas market

European natural gas prices were in the news again last week, soaring by 18%. Given stocks are still low and there are few signs of extra flows from Russia, we think that prices will remain high in the near term.

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.

Spanish inflation surge another headwind to recovery

The jump in headline inflation in Spain in October was almost entirely down to the electricity component. We do not expect this bout of higher inflation to last, but in the meantime, consumers are facing a squeeze on real incomes that risks leaving Spain’s economy even further behind its peers.

12 November 2021
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