Julie Whelan:
Welcome Richard Barkham, our Global Head of Research and Global Chief Economist to the screen. Welcome, Richard.
Richard Barkham:
Hi Julie.
Julie Whelan:
So Richard, there are mixed messages about the direction of the global economy. Consumer confidence is low, business confidence is falling and inflation continues to surprise on the upside, but on the other hand, consumers are still spending and U.S. Job growth continues to outpace the supply of workers, but clearly the concerns around the risks are growing and they're real. Can you help us frame out what the story is today?
Richard Barkham:
Yes, I can. And I think we're heading to recession or at least a very serious slow down. It's important to note despite all the volatility that you've mentioned, we are not there yet. But I think the pressure on the consumer and on business from rising energy prices, high food prices, and most importantly, rising interest rates is going to see demand ebbing away by Q4 of this year and into, the first half of 2023. I would say Europe looks the most vulnerable at this stage. And the war in Ukraine has caused a extremely nasty spike in natural gas price, and that's put a lot of pressure on the economies of Europe. But also I would say that in the United States, the Federal Reserve is about to push interest rates to levels that we have not seen for 14 years, and that will, we've had some slow down in the United States, but there is more to come over the next 12 months or so. So I think we are headed for recession.
Julie Whelan:
So, you talk about recession. And I know from my perspective, the global financial crisis was the last recession that really resonates with me in part because of how severe it was. How severe can we expect this recession to be
Richard Barkham:
Okay, well, I don't want to sugarcoat the message but I think there are factors in play, quite a few of them that might lead us to the conclusion that we're going to face a moderate recession. On the one hand corporate balance sheets are reasonably strong and despite the fact that demand will ebb away, I think because of the war for talent companies will want to hold onto their labor. So I, we may not see widespread spike in unemployment. I would say also that consumers even now, have still quite a lot of savings and cash accumulated from the pandemic period. And they can use that. They can draw that down in tough times. So consumer spending might not dip quite as hard as it might, otherwise have done. And I think with regard to inflation we are not going to some multiyear wage price spiral that we saw in the 1970s that people have talked about.
Richard Barkham:
This is a very nasty inflation spike, but I think we've reached the peak of inflation. I think it's going to ease over the next 6, 12, 18 months. And by the middle of 2023, that will allow the fed and the other central banks around the world to start cutting interest rates so demand can revive. If we look at Asia, which is a really big part of the global economy we see actually China is already in recession, I would argue. And what that means is China is stimulating quite hard, its economy and China should pick up towards the end of this year and into next year. That will be good for demand levels in Asia and good for the global economy. So, I do think there is a route there to a moderate recession. Having said all of that, there are some big downside risks out there as well.
Richard Barkham:
And I think the war in Ukraine is the biggest downside risk. That could escalate in ways that are not predictable, but certainly the impact on global energy prices, even though it's been acute so far, could escalate and that would have a serious impact on Europe. But I also think that rising interest rates--and we're in the upswing of a rate cycle--can be quite unpredictable and can bring about financial crises. And I'm particularly worried about emerging markets right now. Emerging markets are struggling with oil prices with food costs and they themselves hold around 4 trillion of dollar-denominated debt. So they may struggle to pay the interest owed on that debt. We might see some defaults and that could feed through the financial system. So there are big downside risks there, but on balance, we're looking at a moderate recession, I think, that will last through the first half of 2023. And then we'll see things pick up again.
Julie Whelan:
Okay. So the world is a big place, and you mentioned a little bit about Asia, but how do you see the scenario playing out between the different regions?
Richard Barkham:
Well, I think Europe looks to be the most vulnerable as I've pointed out. You've got the rising energy prices and natural gas prices. I mean, that's not just an impact on consumers heating their homes. It's important to realize that those energy prices, those gas prices, that gas feeds Northern European manufacturing business and so the impact there on the Northern European export machine is pretty acute, I think. So that looks a problem. The United States seems to have the most acute inflation problem right now not just through rising prices, but also because labor demand is well ahead of labor supply. But equally I think at the moment in the United States, we're seeing supply chains easing up, we're seeing inventories building up. And I think we're about to see inflation easing there.
Richard Barkham:
as retailers begin to cut prices in order to shift the backlog of inventories that they have. Asia is actually quite mixed. As I've said, China is in recession already, but it's stimulating. But a lot of the big economies in Asia, they export to China. So they've had a hit from the slow down in China. And they're about to take a hit, I think, from the slow down in demand in Europe. On the other hand, as I've said, China is picking up and I think one bright spot for Asia I think is just auto demand. Even though we might be going into a slow down in the United States, there is a backlog of demand, pent up demand for, for U.S. Autos and in Europe, maybe 4 million autos in the United States. And of course, what that means is that that keeps up demand for semiconductors and APAC is a really big semiconductor-producing region. So, China stimulating semiconductor cycle is still pretty strong in APAC might offset some of the current and future downside from the export hit. So you know, I think we see a moderate recession, probably Europe worse at the moment, APAC and the United States may be faring a little bit.
Julie Whelan:
Okay. Thank you for that perspective, Richard. So we have a lot of our sector specialists teed up today to speak about the implications of all of this for real estate. So for your final question from your bird's eye view, how is this outlook going to impact our real estate markets?
Richard Barkham:
Well, all recessions lead to rising unemployment and rising unemployment will feed through, into rising vacancy. Some sectors will be worse hit than others, but rental growth will also ease back quite considerably because vacancy is on the increase. That's the bird's eye view. I think this life sciences data centers and industrial, the sectors that are powered by the digital economy, they're likely to fare better than some of the more traditional sectors. So that's the birds eye view on real estate.
Julie Whelan:
Excellent. Well, thank you for that insight on the global economy, Richard. So in summary, it seems that we do have some turbulence ahead, but there's plenty of reason to believe that we are in route to a soft landing.
