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ECONOMICS

EMEA Real Estate Market Outlook 2020 Midyear Review
13 August, 2020

ECONOMIC OUTLOOK: SEVERE DIP BUT REBOUND IN SIGHT

The pandemic impacted the euro area harder than was expected earlier in the year when the virus first made the global headlines. The euro area suffered a collapse in business activity in Q1 2020, largely because of measures taken in China to contain the spread of the virus. The pandemic and local measures taken to contain the spread mainly impacted European economies in Q2 2020, with the hit to GDP likely to be the deepest decline in its history.


Forward-looking indicators, however, point to a recovery late in Q2 2020 and support CBRE’s base case of a lopsided V or check-mark recovery in the euro area. The Purchasing Managers Index (PMI) – although difficult to interpret – rose strongly in May and June, suggesting that business activity reached a trough in April and is now returning to more normal levels. Retail sales volumes in May also support this view, with the European Union as a whole seeing an increase in sales volumes in May (excluding motor vehicles and fuels) of over 15%. The bounce-back was particularly strong in those countries, such as Germany, that moved swiftly to contain the spread of the virus and were able to remove lockdown restrictions earlier. 

As economies have relaxed restrictions, Google mobility data in the euro area has rapidly improved. In June, on average, euro area mobility was only 10% below normal or pre-crisis levels, a sharp rise on the 50% in late March. As such, we do expect a bounce-back in economic activity in H2 2020. However, the hit to activity was so strong in H1 2020 that a partial rebound will be insufficient to prevent a fall in annual growth. The CBRE House View is that euro area GDP will contract by 8.3% in 2020, before rebounding strongly by 6.4% in 2021. On this basis, it will take some time for euro area GDP to recover to the levels seen in Q4 2019.

There is a higher degree of uncertainty than usual in our forecasts and several sources of downside risk. Firstly, any sustained increase in infections, and the possible need for further lockdowns, would hinder the recovery. Secondly, the labour market may fare worse than assumed as short-time working schemes are unwound. Thirdly, we are assuming that we avoid any severe second and third round income and spending effects, the result of corporate defaults, bankruptcies and mass layoffs. Finally, we highlight the efforts of the ECB, which so far look to be sufficient to maintain stability in the financial markets. 

FIGURE 1: EURO AREA REAL GDP FORECAST (Q-O-Q)

Economics figure 1

Source: Oxford Economics and CBRE Research, 2020.

FIGURE 2: EURO AREA REAL GDP (2019 = 100)

 economics figure 2

Source: Oxford Economics and CBRE Research, 2020.

The pandemic has significantly disrupted European labour markets. In H1 2020, euro area labour markets deteriorated, which translated into a large decline in the number of hours worked. In comparison to the decline in economic output, the rise in unemployment in the euro area has been relatively muted to date. This is in stark contrast to the U.S., where layoffs occurred immediately and in large numbers. Differences in national statistics account for some, but not all, of these differences.

Government policy measures such as short-time working schemes, wage subsidies, and liquidity to firms have played an important role in avoiding large job losses in the euro area. Assuming that these policy measures are effective and can be unwound smoothly, we expect the rise in unemployment this year to be far more moderate than the decline in output. Unemployment in 2021 is expected to be 1.6 percentage points above that recorded in late 2019.

Inflation in the euro area remains subdued and annual rates have now fallen below 0.5%, driven by the fall in energy prices. A weakening labour market, lower demand, falling energy prices and temporary cuts to VAT mean that the inflation outlook will remain very low in 2020.

As we move into 2021, the reversal of temporary tax cuts and higher oil prices against a backdrop of stronger demand will mean that inflation will increase in 2021. Overall, euro area headline CPI inflation is expected to average 0.5% in 2020, increasing to 1.3% in 2021.

 

FIGURE 3: EURO AREA UNEMPLOYMENT RATE, %

 economics figure 3

Source: Oxford Economics and CBRE Research, 2020.

FIGURE 4: EURO AREA CPI INFLATION (Y-O-Y), %

 economics figure 4

Source: Oxford Economics and CBRE Research, 2020.


INTEREST RATES: LOWER FOR EVEN LONGER

The ECB remains committed to ensuring that financial conditions remain supportive in the euro area. The deposit rate remains negative and the ECB has increased the size and pace of the Pandemic Asset Purchase Programme (PEPP), and has now committed to purchasing €1.35 trillion of bonds until June 2021. With such a large and committed asset purchase programme, the ECB has created room for Member States to increase debt issuance substantially without borrowing costs rising significantly. The move appears to have stabilised financial markets, with long-term interest rates now at historically low levels and risk spreads between member states narrowing to pre-crisis levels.

Looking further ahead, the weak economic growth and inflation outlook means that CBRE expects monetary policy to remain ultra-accommodative for at least the next 18 months, if not longer. In fact we do not expect short-term interest rates to rise until 2023. 

Lower-for-longer interest rates, weaker inflation and significant asset purchases mean long-term interest rates will remain at historically low levels, which is good news for real estate. As the ECB continues to distort prices in liquid financial markets, and with the property spread remaining attractive, there is likely to be an increased interest in real assets such as property.

FIGURE 5: EURO AREA POLICY RATES

 economics figure 5

 

Source: Oxford Economics and CBRE Research, 2020.

FIGURE 6: EURO AREA 10YR. GOVERNMENT BOND YIELD

economics figure 6

Source: Oxford Economics and CBRE Research, 2020.

EMEA Real Estate Market Outlook 2020

Contributors

Hollies Ruth326x248
Ruth Hollies
Director, EMEA Forecasting Team
+44 (0)20 7182 3871
+44 (0)755 748 1903
Aaron Hussein
Economist, EMEA Forecasting Team

EMEA Real Estate Market Outlook 2020 Midyear Review