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
Event Drop-In: UK house prices go over the edge – how far will they fall? Starts 1st December 2022 at 10AM GMT Thursday’s data from Nationwide are likely to confirm that the drop in UK house prices that we’d been expecting has begun – but how far are they likely to fall and what will the ripple effects be for…
Canada Economics Weekly Trigger warning Research from the Bank of Canada suggests that half of all variable-rate, fixed-payment mortgage holders have now hit their so-called trigger rates, which means their payments will rise. This is one... 25th November 2022
US Housing Market Update How will banks respond to falling house prices? Banks are likely to tighten credit conditions over the next year to protect themselves from house price falls. But their more cautious approach to lending in this cycle means we don’t think they will... 23rd November 2022
US Housing Market Data Response New Home Sales (Oct.) New home sales have levelled off in recent months, but leading indicators support our view that sales will fall a little further by the end of the year. Looking ahead, we expect stretched... 23rd November 2022
UK Housing Market Update BTL investors face severe financial squeeze The record-low yields on rental properties and fall in house prices we forecast imply poor returns for Buy-to-Let landlords over the next few years. Moreover, the jump in mortgage rates means a... 23rd November 2022
US Housing Market Data Response Existing Home Sales (Oct.) A renewed rise in mortgage rates led to the largest month-on-month decline in existing home sales since February. As the impact of higher rates continues to feed through in the coming months, we... 18th November 2022
US Housing Market Data Response Housing Starts (Oct.) Single-family starts fell to 855,000 annualised in October which was much stronger than what was implied by the low level of homebuilder confidence. We expect further declines in new home sales to... 17th November 2022
Event Asia Drop-In: US-China relations, regional elections and more Starts 24th November 2022 at 8AM GMT November's briefing on Asia’s big macro and market stories included discussion of US-China relations in the wake of the Xi-Biden meeting as well as the economic impact of Beijing’s looser zero-COVI
China Economics Update More policy action needed to revive property sector Recent policy announcements have raised hopes that the property downturn may be coming to an end. But while the measures made public so far reduce some of the downside risks by giving developers and... 17th November 2022
Canada Economics Update Canada Housing Watch (Nov.) The plunge in new home sales in Toronto in September points to further falls in housing starts, although there are at least some signs that the worst may be behind us for home sales and that the... 16th November 2022
US Housing Market Update Rental market conditions begin to ease The small increase in vacancy in Q3 supports our view that the rental market is turning a corner and makes us increasingly confident in our call that rents will fall next year. Conditions remain... 16th November 2022
UK Housing Market Update Renters living alone explain tight rental market The recent surge in rental growth to a record high has been widely reported, but the usual explanations are unsatisfactory. Population indicators don’t suggest a sudden rise in demand, and there is... 16th November 2022
Global Central Bank Watch 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... 10th November 2022
UK Housing Market Data Response RICS Residential Market Survey (Oct.) The October RICS Residential survey showed that the spike in quoted mortgage rates to over 6%, a level last seen in 2008, has triggered a collapse in buyer demand comparable to that seen in the... 10th November 2022
US Housing Market Outlook Sales to slump and prices to fall We expect mortgage rates will hold close to 7% over the remainder of the year, leaving affordability at its worst since 1985. That will lead to another sharp fall in activity. As the economy dips into... 8th November 2022
UK Housing Market Data Response Halifax House Prices (Oct.) The 0.4% m/m fall in house prices reported by Halifax backs up the data from Nationwide that house price falls are becoming entrenched. Surging mortgage interest rates have flattened demand, as many... 7th November 2022
