Europe’s major economies are bracing themselves for a triple hit of slowing growth, ongoing trade wars and Brexit uncertainty.
For real estate investors, Europe still remains an attractive home for global capital, compared with other parts of the world. But after more than 10 years in the current cycle – and at a time of record dry powder – questions are increasingly being asked around how much longer it can run, and whether the European Central Bank’s latest stimulus programme will prolong the cycle further.
David Rea, chief economist for EMEA at JLL, gives his outlook on the big topics facing Europe’s economies going into 2020.
How do you think the current cycle will play out?
The current cycle is different to those that have come before – for one it’s extended in duration and it’s also been fuelled by quantitative easing that’s pushed down the yields available in other asset classes making real estate a more attractive relative proposition.
As the European Central Bank restarts quantitative easing next month, it could further prolong the cycle. How long for is hard to predict, especially as this latest round of QE has no end date. Higher priced markets, such as London and Paris, could become even more expensive.
Of course, the cycle will come to an end at some point – the big questions are when and how. Booms don’t die of old age but are killed off by policy errors or by shocks, such as oil price jumps and banking collapses.
As well as the European Central Bank’s action to stimulate the eurozone, what else can be done?
The fundamentals of the Euro Area economy are pretty healthy: the number of people in work is at record highs, inflation is low and credit conditions are stimulative. But there is no denying the outlook has darkened. Q2 GDP growth dropped to 0.2 percent from 0.4 percent the previous quarter; business confidence has declined, and the manufacturing has been struggling for over a year.
With interest rates already low and in some cases negative, major central banks have limited room for further conventional policy action. Prime borrowers have access to loans at record low rates, which continue to fall, but smaller more risky businesses still face a high cost for credit. Unconventional, perhaps even new, policy tools could be employed to improve credit conditions for those that still face high interest costs
Moreover, with governments also able to borrow at record low, even negative, rates they are ideally placed to provide a large fiscal stimulus should it be needed. Governments can switch on infrastructure investments, cut taxes to boost spending and investment, or increase handouts to support consumer spending. Many were already planning to loosen the purse strong before conditions softened.
The prospect of global trade wars preys on investors’ minds. How are investors likely to react?
So far, we’ve seen escalating trade wars cause significant disruption to the markets – with potentially more to come. U.S. tariffs on European car imports could hit in November causing further issues for the struggling eurozone.
For real estate investors, the story so far has been about the appeal of property capable of offering returns amid the incessant hunt for yield. But we could start to see investors increasingly prioritise safety rather than yield. Politically and economically stable markets, such as the Nordics, are well-positioned to take advantage of that. Prime real estate within major European capital cities could also stand to benefit.
What are the biggest challenges to the region’s economy heading into 2020?
Political uncertainty is ever present and will continue to loom large. Brexit could be a shock or provide a boost if resolved smoothly. Things in Italy have calmed down, but a sustainable solution is yet to be found. Spain is yet to form a government, and Germany faces the departure of second ever longest serving Chancellor as Angela Merkel steps down. With recession fears mounting in Germany, there remains the question of whether it can finally move away from its obsession with the “black zero” of balanced budget economics.
Escalating trade wars are a big risk, especially if they morph into currency wars. There are no signs that protection or populism are going away, and U.S. trade policy remains unpredictable with President Trump at the helm.
For real estate investors, it all adds up to elevated levels of uncertainty in the coming months. The need to understand shorter-term developments but take a long-term perspective has never been more important.
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