Economy

Increasingly successful COVID-19 vaccination campaigns across developed economies are fueling a robust global economic recovery.

Summary

Top of Mind

Most Western nations have administered at least one vaccine dose to more than half of their populations. While several vaccines have proven effective against new COVID variants, much work remains as the pandemic rages in certain countries and less than 25% of the global population has received at least one vaccine dose (Bloomberg, July 2021).

Outlook

A growing commitment to make rapidly rising vaccine supplies available worldwide, along with major advances in therapeutics, likely will meet global demand and provide a solid path to a post-pandemic era. Government policy debate is now focused on the prospects for inflation, rising interest rates and higher taxes. Thanks to an unprecedented fiscal and monetary policy response by world governments, along with proven vaccines, the economic outlook is bright.

Economic Growth

CBRE’s baseline forecast is for strong growth spreading through the global economy in 2021 and 2022, before reverting to long-term trend levels. Generally, Asia-Pacific (APAC) and the Americas will see peak GDP growth in 2021, while Europe and Japan will see their strongest growth in 2022.

GDP in the U.S., China and U.K. is expected to grow by 7.1%, 8.2% and 7.7%, respectively, in 2021. GDP in the Euro Area is expected to increase by 4.6% in 2021, while Japan’s growth will be a bit more subdued at 2.5% in 2021. CBRE expects above trend growth to continue in 2022 across all regions.

Rapid economic growth is laying a firm foundation for recovery across all property types. Industrial and multifamily fundamentals have largely been resilient or have fully recovered, while office, retail and hotels will lag the broader economic recovery. With some variation across markets, CBRE expects office, retail and hotel fundamentals to gradually recover over the next three years.

Lasting Impacts

While the short-term global economic outlook is undeniably good, there are questions about lasting impacts of the pandemic and the policy response to it. Globally, government debt increased by more than $12 trillion in 2020.¹ In addition, the world’s major central banks have increased their balance sheets by several trillion dollars during the pandemic. These dynamics have caused many investors to worry about inflation, the potential for higher interest rates and tax increases to pay for the crisis response.

CBRE believes these risks are overstated. In the U.S., proposals for tax increases will be moderated due to slim Democratic congressional majorities. In France and Germany, upcoming elections will also likely limit plans for any tax increases. While modest tax increases may slightly affect investment horizons and allocation decisions, they will not alter the rapid improvement in real estate fundamentals.

Figure 1: GDP Growth | CBRE House View

Source: CBRE Research, Q2 2021.

Inflation will be uncomfortably high for the next 12 months and then recede. The labor shortage that is pushing up wages and restricting supply will ease, as enhanced unemployment benefits and direct stimulus payments diminish. The global microchip shortage that has restricted the production of cars, computers and other goods will end in the next two quarters. Ultimately, surplus labor, globalization and the normalization of monetary policy will lead to inflation reverting to approximately 2% by 2023.

Figure 2: CPI Inflation | CBRE House View

Source: CBRE Research, Q2 2021.

Interest Rates

Fears that rising inflation will force the U.S. Federal Reserve and other central banks to increase interest rates have the potential to cause market turbulence over the next year. We think that monetary policy will remain highly supportive of economic growth into 2023, even if inflation is higher than expected. Central banks expect inflationary pressures to ease as pandemic-related issues dissipate. However, an end to quantitative easing is expected.

In the U.S., CBRE anticipates 10-year Treasury yields to remain at favorable levels for real estate (between 2.0% and 2.5%) for several more years. In Europe, the German bund is expected to be just short of 1% by 2025. Chinese bonds also are expected to remain relatively stable at around 3.5% over the same period.

The Bottom Line

The near-term economic outlook is very favorable for real estate, with strong growth, dissipating inflationary pressures and historically low interest rates. Economic growth in the Americas, U.K. and China will peak in 2021, even amid uncertainty in trade relations between the U.S. and China and in the U.K.’s post-Brexit era. Elsewhere, most European countries and Japan will see the strongest growth in 2022. This growth will filter into real estate fundamentals and support investment volumes. Overall, CBRE expects that even amid a market landscape shaped by the pandemic, real estate markets will strengthen over the near term.

Figure 3: 10-Year Government Bond Yields | CBRE House View

Source: CBRE Research, Q2 2021.