Real estate, alternative real assets and other diversions

Are we drifting into recession?

The Economist

Figure 1 shows the CBRE ‘real time’ G7 economy tracker, made up of the best and most timely monthly economic data.  

The main developed economies (U.S.A., Canada, Japan, Germany, France, Italy, U.K.) known as the G7 have slowed sharply since the end of 2017. That deceleration appears to have ended, and there is no evidence of a drift into recession, but we should not expect rapid bounce back in activity. Most likely the developed economies will see sub-par growth for the next couple of quarters. 

The Q2 GDP numbers, as foreshadowed by our own G7 indicator are likely to be weak.

The source of the slowdown is easy to locate. The central banks of America and China tightened monetary policy through 2018. The former to ‘normalize’ monetary policy and keep inflation in check, and the latter to bear down on the growth of leverage.  As economic conditions worsened in the early part of the year, both institutions put policy into reverse and that has boosted equity markets.  However, since then businesses have started to cut back on investment because they are unsure how the trade war will play out. If we add to this the current global decline in new car registrations, in part due to technical change, then we have serious and sustained headwind for the global economy.

It is not all bad!  On the plus side, inflationary pressures are de-minimis, and central banks have indicated that monetary stimulation is available. In addition, the major economies continue to add jobs, albeit at a slower rate than before, and consumers remain confident. These factors lead us to believe that no recession is imminent.

Nevertheless, risk levels remain elevated despite the recent stock market recovery. Figure 2 shows the CBRE ‘real time’ China economy tracker. Following a sharp slowdown at the end of 2018, related to policy tightening, China’s economy picked up in the first half of 2019. More recently, due to trade war effects, there seem to have been a renewed decline in activity. We do not think this will continue because of increasing levels of stimulus by the Chinese authorities, but stimulus in China may not be quite as effective as it used to be. 

China, and the emerging markets which it drives, are 37% of the global economy. A soft patch for China is a soft patch for the global economy. Australia, which is strongly exposed to China, is likely to see further rate cuts.

Whilst the global economy is not drifting into recession, it is weak, with specific weakness in the manufacturing sector. Monetary stimulus will help support activity, and the recent ‘truce’ in the trade war will also help. It is even possible to argue that the current weakness has ‘saved’ the global economy from a more serious slowdown in 2020 because it has put a stop to scheduled interest rates increase on the part of the U.S. Federal Reserve. 

On the other hand, it is not easy to see where a pickup in activity will come from absent a more substantial easing of trade tensions. In fact, it has been hard to see anything other than continued sub-par economic activity. Unemployment is unlikely to rise, but the rate of job growth will slacken further.

What does it mean for real estate?

Figure 1 shows that there have been two previous meaningful slowdowns in economic activity in this current cycle. The first was associated with the financial crisis in the Euro Area, the second with the fall in oil prices which undermined non-defense capital expenditure in the U.S. and elsewhere. 






The Economist, zLead Article, zNewsletter

About Richard Barkham

Richard Barkham

Richard is a specialist in macro and real estate economics. He joined CBRE in 2014 as Executive Director and Global Chief Economist. Prior to taking up his position with CBRE Richard was a Director of Research for the Grosvenor Group an international business with circa $10bn of capital under management in real estate. He was also a non-Executive Director of Grosvenor Fund Management where he was involved in fund strategy, risk analysis and capital raising. Richard is the author of two books and numerous academic and industry papers. In 2012 he published Real Estate and Globalisation (Wiley Blackwell, Oxford), which explains the impact on real estate markets of the rise of emerging markets such as China and Brazil. He has extensive consulting experience and is a Visiting Professor in the Department of Construction and Project Management at the Bartlett School, University College London. He holds a PhD in economics from the University of Reading where he taught, in the Departments of Economics and Land Management, between the years of 1987 and 1998.​​​

Articles by Richard Barkham

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