ECONOMIC PULSE FORECAST 2013 November 2012
A Cushman & Wakefield Research Publication
The impact of economic conditions on commercial real estate markets around the world
Global
The Americas
EMEA
Asia Pacific
Global Slowdown with Better Times in Sight
Slow, but not stalled – Stronger growth on the horizon
Master of its own destiny
Moderate Growth is New Norm
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GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
Global Pulse
Global slowdown with better times in sight
Ken mccarthy Chief Economist
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The year 2012 was supposed to be one of government deleveraging when the constraints on growth caused by the sovereign debt crisis in Europe and the United States were gradually loosened. Instead, 2012 became the year of intense political wrangling on how and when these challenges would be resolved, with insufficient progress overall. Continued on Page 3
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ECONOMIC PULSE FORECAST 2013
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Uncertainty about everything from the future U.S. political and policy environment to the complexities of stabilizing the euro zone caused businesses and consumers to ease their foot on the accelerator. While they did not slam on the brakes, they slowed down as a cautionary measure. In the United States and to a lesser extent in Canada, hiring plans have been generally put on hold and consumers pulled back on purchases. In Europe, retrenchment to reduce government debt brought recessions in the southern tier countries, while businesses in other euro zone areas have become more cautious as they wait to see how and if the challenges facing the currency union will be resolved. In Asia Pacific, the weakness of Western economies has slowed export activity and GDP growth outlooks in most regional nations. The same has been true for Latin America where exports to the United States have lagged. While some nations in the developing world have managed to avoid slowdowns through stronger domestic demand, overall, the global economy lost steam as 2012 progressed.
Turning Point For 2013, however, we are expecting some order to come out of chaos as resolutions take shape and uncertainties are dispelled. With a few more positive signs, businesses will move forward on hiring plans and, along with consumers, begin relieving the pent-up demand for everything from durable goods to capital equipment to housing. The impact will differ by regions, but we expect 2013 to be a turning point. As solutions to the political-economic challenges that have plagued the global economy for the past two years are implemented and confidence returns, demand will accelerate and lead to a much healthier economic climate. While 2013 will get off to a slow start, we believe the stage has been set for a significant turn-up late next year and a strong global rebound in 2014 and beyond.
November 2012
Chart 1: U.S. Trade Flows Reflect Impact of Global Growth Challenges 35.0% 25.0% 15.0% 5.0% -5.0% -15.0% -25.0% -35.0% 2007
2008
2009
IMPORTS FROM CHINA
2010
2011
2012
EXPORTS TO EUROPE
Key Analysis • Using U.S. trade data, the chart shows how the slowdowns in the U.S. and Europe are impacting exports and therefore growth. • The slowdown in Europe has caused U.S. exports to that region to decline. In August 2012, U.S. exports to Europe were 6.1% below year-ago levels, only the second decline in the last two years and the biggest drop since November 2009. • Meanwhile, the slowdown in the U.S. is affecting China’s exports. In August 2012, U.S. imports from China were lower than year-earlier levels for the first time since October 2009. Source: U.S. Bureau of the Census
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Slow Crawl in the Right Direction For 2013, economic growth is projected to gain some strength in Europe, remain flat in the United States and Canada until later in the year, strengthen in Latin America and slow in most of Asia. In Europe, stronger is a relative term. Any growth will be an improvement over the dramatic weakness and tumult seen in 2012. However, the nations of Latin America, particularly Brazil, are expected to experience a significant pick-up in growth through 2013, as domestic stimulus has an impact. Growth in Asia Pacific is widely expected to slow in 2013, due to sluggish European and U.S. economies. As exports to the West slow, demand for raw materials from other regional economies will decline, causing nations like Australia to slow. But it’s important to keep in mind that in Asia, slowdown means GDP growth of 5.0% to 5.5%, instead of the 6.0% to 7.0% before the financial crisis.
Real Estate Set to Gather Strength For the real estate sector, the economic retrenching of 2012 is expected to lead to a healthier environment in 2013. In general, the market outlook is for stabilization, followed by improvement in most of Europe as the regional economy moves from stagnation to growth; modest improvement in the Americas led by strength in Latin America and slow improvement in the United States; and healthy growth in Asia, but below the pace of recent years. Of course, real estate is the ultimate “local business” and, around the world, there will be regions and cities with healthy levels of activity and others where markets will be challenging.
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Chart 2: Real GDP Growth – 2011 Vs. 2012 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0%
US
CANADA
BRAZIL GERMANY 2011
UK
FRANCE
CHINA
JAPAN
2012
Key Analysis • In 2012, economic growth is expected to have slowed in just about every major nation. The only exceptions were the U.S., where GDP growth may increase marginally from 1.8% to 2.2%, and Japan, where the 2011 Tsunami aftermath rebuilding has boosted growth. Overall, the global economy is more sluggish than in 2011. Source: Moody’s Analytics
The year 2012 started off with high hopes that the challenges faced by the global economy would be overcome and growth would accelerate. Instead, the difficulties intensified and the expected improvement got pushed further into the future. Nevertheless, the fundamental drivers continue to point to stronger growth. It is now most likely that this acceleration will happen later in 2013, rather than earlier. Cushman & Wakefield remains firmly optimistic that the global economy is poised for a period of stronger growth. The question isn’t if this will happen, but when it will happen.
November 2012
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ECONOMIC PULSE FORECAST 2013
The Americas Pulse
Slow, but not stalled – stronger growth on the horizon
Maria T. Sicola Executive Managing Director Americas Research Listen to podcast
FORECAST 2013 Summary The Americas region is feeling the combined effects of the weak economic performance in Europe and the continuing sluggish growth in the United States. Continued on Page 6
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While this condition is expected to persist in 2013, there are enough healthy signs to be confident that once the uncertainties facing business and consumers have been resolved or, at least, substantially reduced, the regional economies will enjoy a period of strong growth beginning late in 2013 and lasting into 2015.
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While recovery has been weak,
the fundamental forces that drive growth have been steadily improving.
U.S. Recovery: Weakest on Record The U.S. economic recovery officially began
in June 2009. It has been the slowest recovery on record, by far. In the 13 quarters since the recovery began, U.S. GDP has increased a total of 7.2%, or an average of 2.2% per year. By comparison, over the eight previous recoveries, from 1954 through 2001, the average increase in GDP after 13 quarters was 15.4% or 4.7% per year. The weak growth has largely been a result of consumers holding back on spending. In previous recoveries consumers had, on average, increased spending by 14.3%, compared with 7.0% in the current recovery. By contrast, business investment spending has grown at about the same pace in this recovery as previous ones (32.2% in past recoveries and 30.9% in the current one). But while the business sector has been investing, it has not been hiring. Employment growth in the current recovery lags far behind previous expansions (3.5% in the
While recovery has been slow, the fundamental forces that drive growth have been steadily improving, setting the stage for stronger growth in the future.
35.0% 30.0%
Corporate profits are at near record levels: As of the second quarter of 2012, corporate profits in the U.S. were running at an annual rate of $1.92 trillion dollars, the third consecutive quarter that profits in the aggregate have exceeded a $1.9-trillion annual rate. Since the recovery began, corporate profits have increased by nearly 100%. This means that businesses have plenty of capital available to invest and to hire employees when they are ready to take risks.
25.0% 20.0% 15.0%
GDP
CONSUMER SPENDING 2008 RECOVERY AVERAGE
30.9%
32.2%
7.0%
14.3%
7.2%
15.4%
10.0%
0.0%
Another reason that consumer spending growth has remained far below historical averages has been the lack of significant recovery in the housing sector. Home sales have led the economy out of previous recessions. This time housing is a lagging sector. As the banking system works through the huge volume of mortgage delinquencies caused by the housing bust, new home sales have lagged. Since housing has a strong multiplier effect on consumer spending (when a home is bought, so are appliances, furniture and more, along with utilities and financial services) the weak housing recovery has contributed to the muted growth in consumer spending.
Healthy Fundamentals
Chart 1: Growth in Recoveries
5.0%
current recovery versus a historical average of 8.3%). This subpar employment growth is one important reason consumer spending has lagged. It means that income is not growing as fast as previous recoveries and unemployment remains high.
INVESTMENT
2009 RECOVERY
Household debt is at lowest level in two decades: During this recession/
recovery, consumers paid down more debt than they have in any previous cycle. Part of this decline is a result of mortgage defaults, but no matter how it happens, 2009 Recovery it means that household balance sheets are in the best shape they have been in since 1993. 8-Recovery Average
Source: U.S. Bureau of Economic Analysis November 2012
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ECONOMIC PULSE FORECAST 2013
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14.5% 14.0% 13.5% 13.0%
12.0% 11.5%
10.5% 1990
1992
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1998
2000
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Source: U.S. Federal Reserve Board
Pent-up demand is building: As households have put off spending, their existing stock of durable goods, from cars to appliances to furniture, is aging. More and more, households are now looking to replace this aging inventory. The longer this spending is delayed, the stronger the growth will be once pent-up demand is acted on. Interest rates will stay low for the foreseeable future: The Federal Reserve has engaged in multiple efforts to hold down interest rates across the maturity spectrum. These policies have, thus far, not stimulated spending as expected, but
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If current law is not changed,
on January 1, 2013, U.S. taxes will increase and government spending will be cut. This event, now widely called the “fiscal cliff,” will be quickly followed by another debate in February/March when the current debt ceiling will likely be reached.
The Uncertainty Obstacle
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have created an environment that will support strong growth in spending once the demand materializes. In particular, the housing sector will benefit from low interest rates as that key sector revives.
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Chart 2: Household Debt Service Payments As A % of After-Tax Income
How and when the U.S. debt ceiling and euro zone debt crisis will be resolved is weighing heavily on business.
November 2012
The fundamentals are improving, but the U.S. economy remains sluggish. In fact, GDP growth slowed in the first half of 2012 compared with the second half of 2011. The obstacle to growth is uncertainty. Businesses and consumers face a range of unknowns that will have a major impact on their operations and behavior. Until there is more clarity about the following unknowns, consumers and business will tend to spend if necessary, but will avoid risk when at all possible. The U.S. Election: At this writing, President Obama has been reelected for a
second term. While it is uncertain how the new Administration will deal with the impending fiscal cliff and the debt ceiling, we think that negotiations with the “lame duck” Congress will result in the deadline being moved back from January 1, 2013, giving all sides an opportunity address this critical issue. The U.S. Budget Deficit and Debt Ceiling: In 2011, Congress and the President had a major confrontation over how to reduce the budget deficit, which had topped $1.2 trillion for three consecutive years, pushing the total U.S. debt up to record levels. The solution was to appoint a commission to recommend policy changes. If the commission could not agree, or the recommendations were not accepted, a set of automatic policy changes would take place effectively raising taxes sharply and cutting government spending equally severely. The commission proposal failed and we are now facing the results.
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chart 3: U.S. Debt Held by the Public As A % of GDP 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%
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in Europe have already seen demand fall as growth in Europe has slowed to a crawl. As you can see from the EMEA Economic Pulse, there is little prospect for significant improvement in the coming year. There is also a possibility, although considered remote, that the euro zone could collapse if the member nations cannot agree on a solution to the debt issues facing the region and particularly the Southern Tier countries. Such a collapse would have global repercussions, leading to the probability of a Europe-wide recession and upheaval in the financial markets that would affect every major economy. It is the uncertainty about how and when Europe will come to a resolution of its debt issues that is holding business back.
Uncertainties will be resolved
20.0% 10.0% 0.0% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Although there are still many uncertainties facing businesses and consumers, they are expected to be resolved in 2013. Once they start being put behind us, business and consumers are likely to become less cautious, take more risks and act on pentup demand. This will extend to the housing sector where an increase in household
Source: U.S. Bureau of Public Debt and Bureau of Economic Analysis
On January 1, 2013, taxes will increase and government spending will be cut. This event, known as the fiscal cliff, will be quickly followed by another debt ceiling debate in February/March when the current debt ceiling is expected to be reached. At this time, the solution to the debate is difficult to project. While most expect the fiscal cliff to be avoided (that is, the current policy environment to be extended), it is not clear how the debt ceiling debate will go. The uncertainty is not about the ceiling, but about the policies the government will implement to put the deficit on a sustainable downward trajectory. Our expectation is that some form of “grand compromise” will be achieved in the first half of 2013, but how and when is anyone’s guess. Of course, which taxes are raised or lowered, what deductions are added or eliminated and what government programs are cut and by how much will impact every household and every business a little differently. It’s this uncertainty that is making business cautious.
chart 4: New Single-Family Home Sales (Thousands of Units) 1,400 1,200 1,000 800 600 400 200 2005
2006
2007
2008
2009
2010
2011
2012
The Euro Zone: The resolution of the European debt crisis is another unknown
weighing on business. For businesses in the Americas, the impact of conditions in Europe is being felt in several ways. First, companies that export to Europe or sell November 2012
Source: U.S. Bureau of the Census 8
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We expect the U.S. housing
sector to gain continuing strength, and result in accelerating construction starts to relieve record-low inventories by the second half of 2013. formations is expected to cause steady improvements over the next several quarters. Already, we are seeing an uptrend emerge in home sales. Since August 2011, new home sales were up 33%, albeit from record-low levels. We expect the housing sector to gain continuing strength, and result in accelerating construction starts to relieve record-low inventories. New housing starts are already starting to pick up. As of September, they were at the highest level since mid-2008 and up nearly 35% from levels of a year earlier. By mid-2013, a rejuvenated housing sector will start to exert its normal multiplier effect and make an important positive contribution to the economic expansion. The full effects of more clarity and pent-up demand are likely to begin in the third and fourth quarters of 2013 and be fully felt in 2014. At that point, the U.S. economy will grow much more rapidly. GDP growth in the 3.5% to 4.0% range for several quarters is likely, leading to stronger employment growth and a healthy recovery. There is still a great deal of uncertainty that needs to be cleared up, but assuming this will be the case, the U.S. is poised for a period of stronger growth.
Canada The Canadian economy, which has felt the effects of the global downturn in some markets more than others, is slowly emerging from the doldrums. The Bank of Canada, which tends to lean on the optimistic side, forecasts growth of 2.2% this year, 2.3% in 2013 and 2.4% in 2014. Growth will be led by an increase in prices for oil and other commodities as global economic conditions improve and will be reinforced by projected increases in consumer spending and business investment. Tighter mortgage rules and other measures appear to working, as record household debt is starting to decline, which will contribute to a more sustainable market. Overall, though, Canada’s growth is
November 2012
ECONOMIC PULSE FORECAST 2013
expected to remain weak, owing to the slow recovery of the U.S. and global markets and ongoing competitiveness challenges, exacerbated by the persistent strength of the Canadian dollar. As a result, the level of Canada’s exports is not forecast to regain its pre-recession peak until the first half of 2014, unlike imports, which have already fully recovered. Real estate activity in 2013 will continue to be marked by low vacancies and strong development cycles in the central markets of Vancouver, Calgary, Toronto and Halifax, though some softening of demand conditions is anticipated.
Brazil The Brazilian economy experienced a sharp slowdown beginning in late 2011 and extending into the first three quarters of 2012. The Banco Central do Brasil, Brazil’s central bank, raised interest rates sharply in the second half of 2011 in order to combat the threat of rising inflation. But the inflation threat abated as global commodity prices softened and the country was left with a policy mix that caused the downshift. After growing 2.7% in 2011, real GDP is expected to increase only 2.2% in 2012. Recognizing its errors, the central bank reversed monetary policy early in 2012, causing short-term interest rates to fall from 10.4% at the beginning of 2012 to 7.1% currently. This drop had the effect of reducing the exchange rate for the real, boosting exports and making it easier to borrow. These policy changes are beginning to have an impact. Consumer spending rose over the summer, with auto sales reaching record levels. While the private sector has kicked back into gear, the government is also expected to significantly increase spending in the next several quarters. With the World Cup and the Summer Olympics scheduled to take place in 2014 and 2016 respectively, Brazil’s government will be undertaking major infrastructure construction projects in order to prepare for the world sporting events. This combination of strong monetary and fiscal policy stimulus will cause Brazil’s economy to accelerate sharply in 2013. After growing 2.2% in 2012, Brazil’s GDP is projected to expand 5.4% in 2013.
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However, slow U.S. demand was offset in Mexico by strong domestic growth. Consumer spending increased at a 3.9% annual rate in the first half of 2012 and government spending jumped 2.1%. Both are anticipated to slow sharply in the second half of the year. There was a Presidential election in Mexico in May and the government boosted spending ahead of the election in order to attract votes. Now that the election is over (the new President is Enrique Pena Nieto), the government has cut back on its outlays. Spending growth in the second half of 2012 and in 2013 are projected at 0.6% and 0.3% respectively. On the consumer side, the slowdown is not expected to be as drastic. Overall consumption is forecast to fall to 2.2% in the second half of 2012 and to 1.6% in 2013.
Real Estate Implications
Across the Americas, the coming year is expected to be one of transition from modest to strong growth. That transition is most likely to occur late in 2013 and to be fully in place in 2014. For most of 2013, however, economic growth will be dominated by the uncertainty in the U.S. and Europe. As that fog begins to lift, the underlying health of the regional economies, most notably the U.S., will emerge and drive growth higher. For the real estate sector, 2013 may spell another pause in much of North America, while Central and South America will continue to grow at a healthy pace.
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This combination of slowing domestic demand and sluggish exports is expected to cause GDP growth in Mexico to drop from a strong 4.2% in 2012 to a more modest 3.5% in 2012. Overall, Mexico’s economy is expected to continue to outperform the U.S. and Canada, but grow somewhat more slowly than Brazil in the coming year.
The relatively stronger economic growth in Brazil and Mexico is expected to lead to continuing improvement in leasing markets in these countries. In particular, Brazil, which has seen some of the strongest improvement in the world over the past few years, is expected to continue experiencing strong market improvement.
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After a strong first half in 2012, the Mexican economy slowed and is expected to remain that way until early 2013. The key reasons behind the slowdown are fallout from the Presidential election and the continuing sluggish growth in the U.S., Mexico’s largest trading partner. The growth in U.S. imports from Mexico slowed from 10.0% in 2011 to 1.7% in the 12 months to August 2012. Sluggish U.S. demand is expected to continue into 2013, and then pick up considerably as explained previously.
overall improvement in markets. The two industries with the healthiest growth are expected to be technology and energy. Cities that have significant employment in these industries are likely to experience stronger growth and better real estate leasing conditions than those where the industry mix is more heavily oriented toward government, manufacturing and construction. The health care sector is also expected to perform well and cities that have high employment in this sector are likely to exhibit above average improvement in local real estate markets.
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Across the Americas, the coming year is expected
to be one of transition from modest to strong growth.
Real estate is, at its core, a local business. For the Americas region this means that, although the overall trend will be flat in the U.S. and Canada and improving in Brazil and Mexico, there will be exceptions throughout the region. Leasing fundamentals will be broadly positive for real estate, but more as a consequence of continuing low levels of construction than because of rising demand. The U.S. and Canadian economies are expected to generate modest job growth on par with the anticipated slow GDP growth, which will lead to moderate
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ECONOMIC PULSE FORECAST 2013
The Americas 2013 ECONOMIC FORECASTS 3-mo. interest rate 10/1/2012 Trend
10-year bond rate 10/1/2012 Trend
GDP % PA 2012 2013
Inflation % PA 2012 2013
Comments
United States
0.1
1.8
2.2
2.1
2.2
2.3
Growth will remain sluggish until fiscal uncertainties become clearer. Inflation will remain low. Stronger growth possible by late 2013.
Canada
1.0
1.9
2.2
2.3
1.8
1.9
Slowdown in U.S. holding back growth. Rising domestic debt may cause consumers to cut back. No inflation concerns.
12.8
12.0
2.8
2.8
10.1
10.8
Brazil
7.1
9.2
2.2
5.4
5.2
4.9
Low interest rates stimulating growth. Infrastructure spending will boost economy sharply in coming year. Rising commodity prices boost inflation.
Chile
3.5
5.4
4.9
4.6
3.2
4.1
Healthy GDP growth largely a result of rising domestic demand. Some danger of overheating, but growth appears to be slowing to a sustainable pace. Strong growth will raise inflation.
Colombia
4.8
6.0
4.8
4.8
3.3
3.5
Strong domestic demand is offsetting weakness in exports to developed nations and keeping the economy growing at a healthy pace. Strong currency keeps inflation low.
Mexico
4.8
5.4
4.2
3.5
4.2
3.0
With the election over, the economy will experience fiscal drag as government spending slows. Also pulling down growth will be the continuing sluggish growth in the U.S.
Peru
2.5
4.5
6.2
5.6
3.6
2.8
Solid domestic growth is being driven by rising consumer spending, strong investment and healthy growth in construction. This balanced growth is not expected to boost inflationary pressures.
Venezuela
8.5
11.0
5.0
0.1
23.6
34.1
Argentina
Growth has slowed sharply and will remain slow in the coming year as government deficit and intervention in economy increases. Inflation to remain high.
With Hugo Chavez reelected, Venezuela is in for a difficult year. The government will be forced to cut spending after a splurge prior to the election, which boosted demand temporarily. The price for that growth will be paid in 2013. A currency devaluation is likely to raise inflation.
(Based on October 2012 data)
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EMEA Pulse
Master of its own destiny
David Hutchings Partner Head of the European Research Group
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Forecast 2013 Summary Europe’s problems are clearly deep and long lasting, but they are not universal across all markets and, while there is a long road left to travel and plenty of room for unpleasant surprises along the way, the first building blocks of a sustainable solution appear to have been put in place. Continued on Page 13
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ECONOMIC PULSE FORECAST 2013
Continued from Page 12
Amidst deleveraging and the ongoing debt crisis, it is of little surprise that Europe has failed at least up until now to shrug aside its woes. With decision-making delayed and risk-taking by businesses and investors reduced, the region has seen not only weaker sentiment and output, but also a steady fall in growth expectations. The key point undermining confidence has clearly been the disastrous handling of euro zone sovereign debt problems, with one incomplete solution after another served up to an increasingly resigned population in Europe and around the world. As a result, global players are losing confidence in the region’s politicians and their ability to do what’s necessary. However while they have acted slowly, less than elegantly and frequently against a sense of rising panic, it is fair to say that they have acted and gone further than even optimists expected just six months ago. Hence, the news is no longer all bad and, after several false starts, the first parts of a solution are taking shape in the form of a more robust firewall between countries and between the banking and public sector, and with the start of serious negotiations on greater fiscal and banking cooperation and control. This is only a start however and recent events have shown again that market patience is thin, with apparent back sliding over what the banking union within the euro zone may look like and what liabilities it may cover, causing uncertainty and suspicion. At the same time, the ECB’s new bond buying initiative, Outright Monetary Transactions or OMT, was meant to reassure the markets that there was less risk than they thought attached to the bonds of Spain in particular. In fact, it produced speculation and impatience as to when Spain would actually come forward for help, despite the fact that the government in Madrid was in the midst of planning new austerity measures and bank support, while also facing the complication of increased political opposition.
All this shows the need for continued firm action and to strike the right balance between austerity, reforms and growth to keep the people as well as the markets happy. Indeed, it is clear that the authorities must look at applying the corrections required over a longer period and in gradual stages in order to minimize the obvious risks. Still, we now appear to be heading in the right direction, and remain convinced that no one will leave the euro zone in the short-term. An exit for Greece is possible one day, but not likely soon. What is also probable is that the authorities are getting in a better position to properly manage the situation if anyone did leave – hence reducing the scope for disaster.
Deficits and Surpluses While austerity measures are now in place across most of the region, only one country (Norway) is expected to run a budget surplus this year, and less than half are on course to make an improvement compared to 2011. A number are, however, Chart 1: Drivers for Growth in Europe 8.0%
6.0%
4.0%
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2.0%
There is still a long way to go
to resolve the underlying debt crisis, but the ECB has given Europe some breathing space to work and the environment is getting better.
0.0%
-2.0%
CONSUMER SPENDING
CORPORATE INVESTMENT 2010
2011
GOVERNMENT SPENDING 2012
MANUFACTURING OUTPUT
2013
Source: Oxford Economics, Cushman & Wakefield
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managing to run a primary budget surplus – that is, before interest rate charges are taken out – including Italy and Germany. Fifteen out of the 31 countries examined (see chart 3 on page 16) are also running a deficit on the right side of the euro zone’s 3% target (albeit only six of these are actually in the euro zone). That number will increase to 20 out of 31 next year on current projections and only two (Greece and Slovenia) are forecast to have a deficit over 3% by 2016. This, however, is based on an assumption of four more years of tight spending in most areas – a policy that would be easier to maintain if other areas of spending in the economy were picking up and other segments – such as exports – were generating a surplus. The euro zone as a whole does expect a small trade surplus of 1.2% this year, thanks largely to Germany, Luxembourg, the Netherlands, Austria, Ireland and Slovakia. Outside the euro zone, Sweden, Denmark Switzerland, Russia and Norway are all producing a strong trade surplus. The UK, meanwhile, is seeing both trade and public sector deficits, as are many other European markets including Greece, Cyprus, Lithuania, Spain and Portugal, and, to a slightly lesser degree, France, the Czech Republic and Hungary.
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The variability of trading deficits between markets is generally more pronounced than public sector deficits – indeed, the gap is widest for the stressed periphery of Europe. The GIIPS (Greece, Ireland, Italy, Portugal and Spain) had an average public-sector deficit in 2011 of 4.8% of GDP versus 3% for the rest of the euro zone. However, the GIIPS had an average trade deficit of 3.8% in 2011, while the rest of the euro zone ran an average surplus of 2.6%. This imbalance has made the debt in parts of the euro zone much more sustainable than in other areas. Interestingly, that
2013 will not be a year of growth, but hopefully
it may be one of stabilization. This will provide a platform for reform upon which recovery can eventually be built – if the politicians can deliver.
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Chart 2: Growth by Region 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
2010 SOUTH
2011 CORE WEST
2012 NORDICS
2013 CENTRAL
EAST
Source: Consensus Economics, Oxford Economics, Cushman & Wakefield
balance is changing, with Italy in particular moving into a trade surplus, but other “indebted” markets, including Portugal and Greece, are also improving their trade balance. While in large part this is due to import demand falling faster than exports, it is still a potentially positive sign if the improvements can be sustained.
Generating Growth Austerity will of course be the order of the day for some time, but it is only part of the solution. Looking forward, “growth” will be increasingly in demand. However, it will be elusive, with the medium-term potential in much of Europe remaining below pre-crisis levels – at least until reforms kick in to make business more competitive and productive. Hence, while further austerity is needed to stabilize deficits and control excessive borrowing, something of a respite is likely as governments push back the timeframe for debt reduction to also focus on a return to growth.
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GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
The solutions to solve the debt crisis need to be applied
gradually over a period of time to minimize risks even though deleveraging will then be a bigger hit to medium-term growth potential.
Notwithstanding this more relaxed approach, those countries that don’t undertake reforms and carry through on austerity will increasingly be pushed to the bottom of the investment pile. One of the most important lessons for European decision makers is that economic growth is not automatic. Every nation needs to work hard to deliver an environment that can promote it, and this is dependent on business efficiency, transparency and demographic prospects, along with political and social stability.
The Growth Outlook Despite signs of improvement in the wider debt crisis since the summer, sentiment indicators remain weak. We can expect another slow, uneven, and volatile year, with a number of countries staying in recession as austerity bites and global trade is slow to pick up. The environment will also be hit from time to time by political uncertainty, such as key elections in Germany and Italy.
will lead followed by Germany, Switzerland and the UK, but risk patterns may alter if financial markets start looking for other victims. If they see solutions taking shape in Spain and elsewhere, this may bring different markets into the firing line. Meanwhile, higher growth emerging markets in the Middle East and North Africa may see a delay in the arrival of their peace dividend from the Arab Spring, but demand is growing from some inward investors ready to take a long-term view, and hopefully stability will slowly build. Inflation remains a key concern in many markets, but despite increased quantitative easing and renewed concerns over food prices, cost pressures are likely to remain low until demand grows more robustly. Muted inflation should therefore be something of a support to consumer spending power in 2013/14, although price pressures could escalate after then, and normalize interest rates quicker than some suspect.
Property Implications If we are right in our reading of the economy, the implications for the property market will be varied, with many occupiers remaining defensive, but some acting or preparing to release pent-up demand as confidence improves. Nonetheless, with tight profit margins and high levels of uncertainty, most occupiers will be looking for a better deal from their property and will want efficiency and better operating conditions – and in many cases a smaller footprint. More may also be looking to release value from their property where they can, with more asset sales and lease re-gears, for example. At the same time, many occupiers are still releasing older surplus space and weaker businesses will continue to fail as the banks deleverage and weed out under performers, resulting in a further hit to secondary real estate.
November 2012
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Growth will be led by a handful of emerging markets – notably Russia and Turkey – but their expansion will be slower than it was previously. Elsewhere, the Nordics
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Once again, there are positive signs to give us hope. Recent output data has improved in some countries and, what is more, stimulus measures planned for next year include higher government investment in a number of areas, easier finance in others (such as the UK) and tax cuts in some (such as Germany and Italy). As a result, forecasts for Europe as a whole are for slow but positive growth, hopefully helped by greater corporate confidence feeding into business investment. Reforms may take time to act of course, but they too should help confidence and short-term growth to some extent.
ECONOMIC PULSE FORECAST 2013
While austerity alone cannot deliver growth, it is equally
the case that growth alone cannot solve the debt problem: reform and a further sharing of debt burdens are needed. 15
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GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
A number of countries will remain in recession through the first half of next year,
Chart 3: Twin Deficits: Trading and Current Account Balance 20.0% 15.0% Surplus or Deficit, % of GDP
but modest positive growth is forecast for the region overall. What is more, the sluggish “average” of the region will hide some stronger areas of regional and sector growth.
The market will therefore become even more nuanced and stratified for occupiers. Prime markets will continue to suffer from limited new supply, leading to some rental increases in the top-tier of core, accessible cities. The secondary tier will increasingly splinter as better space is reassessed – some will be “reabsorbed” into prime tiers, some will benefit as effective lower-cost tier 2 space, and some will be reworked to a higher standard where the location is right. Weaker tiers in the secondary market will require new investment, otherwise they will slip into tertiary categories and see values fall significantly until costs suit less productive uses and users.
5.0% 0.0% -5.0% -10.0% -15.0%
PUBLIC SECTOR BALANCE (2011) -3.0% THRESHOLD
CURRENT ACCOUNT BALANCE (2011)
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Source: Consensus Economics, Oxford Economics, Cushman & Wakefield
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The investment market has also seen greater caution in decision-making, but liquidity injections by the Bank of England and European Central Bank among others will help hold down interest rates and return benchmarks. This will benefit stableincome prime property, which offers downside protection as well as exposure to the upside when it comes. Indeed, unlimited central bank support will help boost asset values and stabilize the debt overhang. The liquidity provided will also slowly push people up the risk curve in M&A, for example, and in seeking higher income assets, although with equity buyers remaining in control of the market rather than debt-driven buyers, risk tolerances will only slowly increase.
10.0%
NORWAY HUNGARY RUSSIA ESTONIA SWITZERLAND SWEDEN LUXEMBOURG FINLAND GERMANY TURKEY BULGARIA DENMARK CZECH REPUBLIC AUSTRIA BELGIUM ITALY NETHERLANDS ROMANIA PORTUGAL EZ SLOVAKIA POLAND FRANCE CYPRUS UNITED KINGDOM SPAIN GREECE IRELAND
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A Cushman & Wakefield Research Publication
For real estate, an early return of rental growth is unlikely, but activity should steadily increase in 2013 as opportunities emerge for occupiers and investors to improve their property holdings.
November 2012
16
GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
ECONOMIC PULSE FORECAST 2013
EMEA 2013 ECONOMIC FORECASTS 3-mo. interest rate Sep 2012 Trend
10-year bond rate Sep 2012 Trend
GDP % PA 2012 2013
Inflation % PA 2012 2013
Comments
0.7
1.0
2.2
2.0
The fundamentals for domestic demand remain relatively good, but weaker exports and the ongoing euro zone debt crisis has hit confidence, with consumer spending stagnating as a result.
3.4
3.5
2.8
3.1
Higher government spending is sustaining economic growth, but lower oil prices will dampen the economy and ongoing political uncertainty means that confidence over future trends remains fragile.
2.5
-0.3
0.1
2.7
2.0
Belgium has seen a broad-based slowdown that will continue so long as the euro zone debt crisis restrains export demand and the country’s high debt leaves it vulnerable to any change in sentiment.
0.6
3.6
0.8
1.6
2.7
3.1
Relatively good recent growth has been broadly based and, while export demand in the euro zone may weaken, real wages have kept pace with higher inflation, which will support domestic spending.
Czech Republic
0.8
2.3
-0.9
0.9
3.3
2.4
The economy’s fall into recession due to weaker exports and the impact of austerity and unemployment on domestic demand may now be easing, but growth will be at best subdued.
Denmark
0.3
1.3
0.1
1.1
2.4
2.0
The economy has hovered close to recession with uncertainty and deleveraging holding back consumer spending and corporate investment not helped by ongoing banking consolidation.
Finland
0.2
1.8
0.5
1.1
2.9
2.4
The economy has slowed by more than expected, with internal and external demand weak, but inflation has remained high, with tax increases offsetting lower energy prices.
France
0.2
2.2
0.1
0.3
2.1
1.7
France has avoided recession, but deficit targets are not being met and further austerity is planned. Private sector deleveraging and higher unemployment also suggest demand will be slow to pick up.
Germany
0.2
1.4
0.8
0.9
2.0
1.9
The economy has been relatively resilient so far, but it is reliant on wider European demand and with confidence down, growth will be subdued unless consumers slowly increase their spending.
Greece
0.2
19.5
-6.7
-3.6
1.3
2.3
Economic contraction continues and with weaker employment and corporate investment, a return of growth before 2014 is unlikely although agreement to extend the period for austerity would help.
Hungary
6.6
7.4
-1.2
0.6
5.7
4.4
Growth prospects will remain limited in the short term with weaker exports and the need for more fiscal tightening to hit IMF targets only partially offset by further interest rate cuts.
Ireland
0.2
5.3
-0.1
1.1
1.7
1.5
Domestic demand remains weak, but ongoing fiscal consolidation and a return to the market to raise debt are clear signs of Ireland’s steady progress. Proposed EZ banking support would help further.
Israel
2.2
3.8
3.1
3.2
1.9
2.3
The economy has continued to perform well, but slower European demand is likely to impact in the months to come and a relaxation in monetary and possibly fiscal policy may occur in response.
Italy
0.2
5.2
-2.4
-0.7
3.2
2.3
The deeper recession means that fiscal balance will not be hit as early as hoped and a return to growth relies on reforms as well as maintaining political stability once Monti’s term ends next year.
Luxembourg
0.2
n/a
-0.2
1.3
2.1
1.9
Weak EU demand and banking problems have slowed the economy, but threats to the Duchy’s role as a regional finance centre appear to be reduced, helped by early adoption of new EU fund rules.
Netherlands
0.2
1.7
-0.5
0.4
2.5
2.3
Pro-European parties succeeded at the recent election but face a tough battle with an economy hit by weak exports and poor consumer sentiment due to real wage falls, joblessness and deleveraging.
Austria
0.2
1.9
Bahrain
1.2
n/a
Belgium
0.2
Bulgaria
November 2012
n/a
n/a
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A Cushman & Wakefield Research Publication
GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
EMEA 2013 ECONOMIC FORECASTS 3-mo. interest rate Sep 2012 Trend
10-year bond rate Sep 2012 Trend
GDP % PA 2012 2013
Inflation % PA 2012 2013
Comments
Norway
2.0
2.1
3.6
2.8
0.8
1.5
Further outperformance is likely, but robust recent growth may not be matched as weaker European demand and the strong krone hit exports and local confidence, and as government spending slows.
Poland
4.9
4.7
2.4
2.1
3.7
2.7
While above regional averages, growth has slowed due recently to weaker domestic demand. However, fiscal policy has been relaxed in response and interest rate cuts are also likely.
Portugal
0.2
8.1
-3.3
-2.0
3.0
1.8
Domestic demand remains weak although net trade has been more positive. Austerity measures will however continue to pull down growth, despite a relaxation in deficit targets being agreed.
Romania
5.1
6.7
0.9
1.8
3.4
4.3
Political uncertainty is hitting confidence and the currency, while weaker export demand is also a threat. However, with inflation down, interest rate cuts are likely.
Russia
7.2
7.8
3.7
3.6
6.7
6.0
Strong domestic demand has maintained Russia’s outperformance despite weaker exports and this has allowed interest rate increases to tackle higher inflation – although further hikes look unlikely.
Slovakia
0.2
n/a
2.2
1.9
3.5
2.9
Slovakia has performed ahead of expectations as increased competitiveness has been rewarded by higher exports. Domestic demand however is weak, hit by austerity and falling confidence.
South Africa
5.1
6.6
2.6
3.2
5.5
5.4
Growth has been stronger than expected with buoyant domestic demand offsetting weaker exports. However, recent unrest in the mining sector will hit output as well as costs and perceptions of risk.
Spain
0.2
6.0
-1.6
-1.6
2.4
2.4
The recession will continue next year with further austerity announced ahead of possible ECB intervention in the bond market and support to the banking sector, but a return to growth requires greater political leadership and acceleration in economic reforms.
Sweden
1.6
1.5
1.2
1.7
1.1
1.2
After a strong start to the year, demand domestically and externally is now slowing, but with inflation down, the path is clear for interest rate cuts, and relatively good growth is still forecast.
Switzerland
0.0
0.5
0.9
1.2
-0.6
0.4
Weak external demand and the strong Franc have led to subdued growth, but it is still above average, with domestic demand remaining quite robust and government spending also increasing.
Turkey
6.6
7.8
2.9
4.0
9.0
6.9
Good export growth has offset weaker domestic demand, but interest rate cuts and employment growth should help consumer confidence and hence activity in the months ahead.
Ukraine
23.8
n/a
n/a
1.3
2.9
1.7
8.5
The economy was boosted by this summer’s Euro 2012 football championship, but has now slowed despite higher pre-election spending. With higher deficits, further IMF support will be hard to win.
UAE
1.3
n/a
n/a
2.7
4.0
0.9
2.3
Slower global demand subdued the economy this year, but this should reverse in 2013, helped by higher oil output, although the impact of sanctions on Iran are hard to judge, particularly for Dubai.
UK
0.6
1.7
-0.2
1.2
2.7
2.2
The economy is weak, but did at least move out of recession in Q3, helped by a robust jobs market, higher industrial output and a stabilization in consumer demand as inflation has eased.
Western Europe
-0.3
0.4
2.2
2.0
Slower global demand and the euro zone debt crisis have hit activity across the region and, while now stabilizing, recovery looks like to be uneven, protracted and volatile.
Eastern Europe
2.7
3.1
6.4
5.5
Much of the region is highly exposed to euro zone export demand, but while fiscal austerity is also hitting activity, the spread of performance and risk market by market continues to widen.
n/a
Source: Consensus Economics Inc, Oxford Economics, Cushman & Wakefield, and Financial Times November 2012
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GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
ECONOMIC PULSE FORECAST 2013
Asia Pacific Pulse
Moderate growth is new norm
sigrid zialcita Managing Director Research Asia Pacific
Listen to podcast
Forecast 2013 Summary Economic expansion will continue across Asia Pacific through 2014; however, the outlook is less buoyant compared with recent years. While a weak global environment will continue to hold back export activity, a downshift in China’s growth also stands to dampen the outlook of neighboring countries, given its deepening trade linkages in the region. Continued on Page 20
November 2012
19
A Cushman & Wakefield Research Publication
GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
Continued from Page 19
The New Norm
chart 1: Asia Pacific GDP Growth
9.0% 20,000
4.0% 3.0% 2.0%
5,000
1.0% 0
0.0% 2005
2006
2007
2008
NOMINAL GDP
2009
2010
2011
2012
2013
REAL GDP GROWTH
Source: RGE
INDIA: Meanwhile, a sense of urgency has developed in India as weakening external
demand, a tight monetary policy aimed at persistently high inflation, widening budget and trade deficits and delayed reforms corroded economic growth this year. In September, the Indian government unveiled measures to allow greater foreign participation in the retail, airline and broadcasting sectors. This was followed in October by the approval of a long-pending plan to allow more overseas investments in insurance and opening up the pension sector to foreign investors. These policy steps, while significant, are unlikely to change India’s macroeconomic imbalances in the short term so real GDP growth is likely to dip below 6.0% by the end of 2012. The country should start reaping the benefits in 2013, with increased investments boosting real GDP to around 7.0%, though still below the 8.0% to 9.0% growth rate achieved in recent years.
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6.0% 5.0%
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Even so, the rebound in activity is likely to be modest and real GDP growth is expected to dip below 8.0% through next year – in line with the policy objectives laid out in the 12th Five-Year Plan. Such a downshift has had ripple effects on the outlook for the rest of Asia, predominantly through lower intraregional trade. Notably, China has become a major trading partner for the region, accounting for over 17% of exports. Cushman & Wakefield estimates that a 1% drop in China’s GDP could induce a decline of at least 0.5% in regional GDP. Of course, the impact per country varies, but will likely be most amplified for China’s largest trading partners in the region including Hong Kong, Japan, Australia and South Korea.
15,000
10,000
y
In China, declining export activity and restrictive policies to curb an overheating real estate sector have combined to slow momentum this year. However, the slowdown has overshot expectations. As such, the central bank has embarked on policy easing, and, most recently, the government has boosted spending on investment and provided more support for exporters. At the same time, those efforts are being carefully balanced to avoid repeating the excesses brought about by the aggressive fiscal stimulus during the global financial crisis.
8.0% 7.0%
The days of heady economic growth may be a thing of the past. A continuation of slow global recovery and deceleration in Asia Pacific’s most dynamic economies suggest that the regional outlook calls for a period of moderate, rather than high, growth through next year. Specifically, real GDP is expected to rise 5.0% to 5.5% across Asia Pacific through 2014, as compared to 6.0% to 7.0% growth rate achieved in the years preceding the global financial crisis. CHINA: This new norm is partly driven by the region’s largest growth economies.
10.0%
25,000
US$ billion
Meanwhile, inflationary pressures will abate in most countries. The crisis in the euro area and fiscal uncertainty in the U.S. remain the most serious threats to the regional outlook, but ongoing political conflicts among three large economies in the region are also threatening to undermine economic cooperation, which is integral to trade. In spite of these headwinds, fiscal and monetary policies in most parts of the region are expected to be supportive of economic growth, which, in turn, will fuel a steady improvement in property fundamentals.
Asia Pacific will remain the global growth leader through 2014.
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GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
ECONOMIC PULSE FORECAST 2013
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China’s share16.78%
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chart 2: Asia Pacific Regional Imports
Moderate growth is the new norm, reflecting a slowdown
in China and India and in other trade-oriented economies largely due to continuing subdued global demand.
4,000
US$ billion
198% increase 3,000
2,000
mitigate the weak external environment and eke out real GDP growth of 1.0% to 2.0% through next year. In South Korea, consumption continues to face headwinds prompting the Bank of Korea to cut interest rates in October. However, there is limited room for further monetary policy easing and fiscal policy will likely play a greater supportive role going forward. Singapore could see further upside arising from its construction sector and significant investments in infrastructure projects.
China’s share10.17%
1,000
0 2002 OTHERS
JAPAN
HONG KONG
2011 SOUTH KOREA
SINGAPORE
GROWTH POCKETS AND A SILVER LINING: There still are some pockets of AUSTRALIA
Source: Governments’ websites
JAPAN: The outlook of the region’s largest advanced economies has also been tempered. In Japan, while reconstruction-related spending should help economic expansion this year, further slowing abroad as well as tepid private consumption will cause real GDP growth to slide next year. AUSTRALIA: Similarly, Australia’s economic growth will expand below trend as
investment outside of mining continues to retreat, particularly in the manufacturing sector. Additionally, the boom in its mining sector, which has been a bright spot for this country, appears to be fading amid weakening economic outlooks around Asia (especially China), slumping prices for industrial commodities and rising production costs. Case in point: resource mining companies Fortescue Metals Group Ltd., BHP Billiton and Rio Tinto have aggressively been reining in investments. As a result, the Reserve Bank of Australia cut interest rates in October and is likely to maintain an accommodating stance if conditions in China weaken more than expected, and further undermine its economic growth. EXPORT ECONOMIES FEEL THE PINCH: Needless to say, the other locus
of weakness is on open, export-oriented economies. Hong Kong, Singapore, South Korea, and Taiwan will have to rely on domestic demand and public investments to November 2012
stronger growth in the region, particularly in Southeast Asia. Indonesia, Malaysia, and the Philippines are expected to grow by 4.0% to 6.0%, just modestly below the high rates achieved in the years prior to the global financial crisis. Resilient domestic demand and government spending, as well as an improvement in structural policies over the past decade, should prolong their economic gains. However, Indonesia will also feel the impact of a slowing China, as its mining sector adjusts to declining commodity prices amid ebbing Chinese demand. A year after the flooding, Thailand’s economy is rebounding with a pick-up in private demand and government reconstruction spending and stimulus measures; foreign direct investment is also rising as companies use the country as a base to access the rest of Southeast Asia. Meanwhile, in Vietnam, the government relaxed policies this year to boost growth after spending much of 2011 battling high inflation and trade imbalances. However, these policies are likely to filter into its economy late-2012 to next year, with the State Bank of Vietnam continuing to prioritize growth over inflation with credit-fueled inflation no longer a concern. One silver lining to slower growth forecasts is the easing of inflationary pressures through next year. This is also due, in part, to the recent decline in commodity prices and lagged effect of the policy tightening during 2010/11 aimed at relieving overheating pressure. Although headline inflation remains elevated in India and Vietnam, the inflation rate for all of Asia Pacific should fall to 2.0% to 3.0% through 2014. Hence, there is room for further policy support for economic growth if required, especially against a backdrop of moderating inflation. Additionally, most 21
A Cushman & Wakefield Research Publication
GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
economic integration could suffer a setback. Notably, all three countries have been collaborating on several initiatives on trade and finance among others that would strengthen the region’s resilience.
15.0% 10.0% 5.0% 0.0% -5.0%
PUBLIC SECTOR BALANCE
JAPAN
INDIA
MALAYSIA
VIETNAM
TAIWAN
THAILAND
PHILIPPINES
INDONESIA
CHINA
AUSTRALIA
SINGAPORE
HONG KONG
-15.0%
SOUTH KOREA
-10.0%
CURRENT ACCOUNT BALANCE
Source: Governments’ websites
countries boast well-capitalized banks, modest government deficits and large financial reserves that will allow them to deploy fiscal and monetary stimulus to boost demand.
Risks to the Outlook
November 2012
The Philippines could be a different story given its strong macroeconomic fundamentals. This round of easing would further widen the interest rate differentials and likely result in currency appreciation, unless its central bank intervenes again. For Singapore and Hong Kong, the impact could hit their real estate sector, driving up property prices and inflationary pressures. Consequently, in response to QE3, Singapore’s government announced its sixth round of residential property tightening measures since September 2009, following Hong Kong’s mortgage tightening guidelines.
Real Estate Implications With economic growth still the main story in Asia, real estate will generally show strength. For the office sector, sustained job gains will underpin steady improvement in leasing activity well into 2013, albeit strong increases are less likely. Grade A rents still have room to grow in most cities – with new records likely to be set in Shanghai, Beijing and Jakarta on the back of sub-10% vacancies.
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The ongoing sovereign debt crisis in Europe and the looming fiscal cliff in the U.S. pose major risks to the outlook, even with encouraging steps taken by monetary authorities in both regions. As well, territorial disputes involving three of the region’s largest economies are starting to take a toll. The political tension between China and Japan due to the ownership of a group of islands has already led to a “mini-economic cold war,” with Chinese consumers shunning Japanese products. Likewise, Japan and South Korea ties have been under strain due to a long-running territorial dispute over islands halfway between the two countries. While the impact of these territorial spats has been relatively limited, efforts to promote
The latest round of quantitative easing (QE3) by the U.S. Federal Reserve Bank has also raised concerns. Such action can influence liquidity, interest rates and risk sentiment, encouraging investors to take on more risk as they seek higher returns in stronger economies in Asia. This can result in rapid capital inflows and put pressure on currencies to rise, making export economies less competitive. However, we estimate that the outcome of QE3 will be different compared to previous episodes. Interest rates are already low, macroeconomic conditions are less robust and central banks in the region have been loosening policy. Because the interest rate spread will not be as significant, it is unlikely that substantial foreign inflows to Asia will occur on the same scale seen in the previous two rounds of QE.
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20.0%
Ke
chart 3: Surplus or Deficit (% of GDP)
A soft landing in China will also reinforce a growth slowdown in the region as it has evolved into a vital source of export demand for most Asian economies.
22
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Most countries have the scope
for pro-growth policies in this uncertain environment, partly aided by lower inflationary pressures.
In India, absorption in special economic zones (SEZ) in NCR, Bangalore, Hyderabad and Pune is likely to edge up with tax holidays set to expire in 2014, while a thriving business process outsourcing industry could still spur Manila’s office sector. Meanwhile, the ongoing regression in rents in Seoul and Tokyo is likely to ease next year. Similarly, sustained demand from non-financial institutions and a controlled construction pipeline will help to slow rent correction in Singapore’s CBD. We also see Singapore banks as beneficiaries of fund inflows from Asia’s rising wealth, which could make this sector active once again, after sitting on the sidelines in 2012. However, rental rates in Australia, Hong Kong’s Greater Central and supply-heavy markets such as Hanoi, Ho Chi Minh and Kuala Lumpur are likely to remain under pressure through next year. In Australia, leasing momentum has come off the boil in key cities with retrenchment in mining and financial sectors; consequently, rents and occupancies are expected to descend from current high levels. In Hong Kong, the lack of demand and large space givebacks from a contracting financial sector will lead to further rent adjustments in Greater Central next year. However, ongoing tenant decentralization (spurred by relatively high rents in Greater Central) has boosted take-up levels in non-core locations. Given a lack of new supply and low availability in some of these locations, rents particularly in Kowloon are expected to trend up.
According to recent studies by Credit Suisse and Cap Gemini/RBC Wealth Management, Asia is already home to more millionaires than the U.S., with the population expected to swell by 70% in the next five years to 11.7 million.
November 2012
SOFTER INDUSTRIAL OUTLOOK: Solid but moderating consumption and
industrial production point to a softer picture for the industrial sector next year. Logistics, warehouse and manufacturing facilities should continue experiencing positive leasing and rent growth momentum across the region, aided by healthy demand. Clearly, progress will hinge on improvements in infrastructure, supply-chain efficiency, technology, and regulation. In China, the government continues to invest in manufacturing, particularly in tier 2 cities, offering incentives to attract industrial companies inland. The current environment also provides reasonable support to the investment sales market – marked by reasonable availability of relatively low-cost debt, healthy secondary market liquidity, and largely healthy property fundamentals across most markets in the region. We believe this backdrop will remain supportive of asset valuations and stable yield spreads, which should continue to make commercial real estate in Asia Pacific attractive. At the same time, the U.S. Federal Reserve and the European Central Bank’s active support to improve the recovery momentum is a welcome boost to investor confidence and transaction velocity. While much of the investment focus in the region will remain in well-located, liquid core properties in key gateway cities, excess returns are possible by taking exposure to growth markets through development or value-add strategies.
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RETAIL BRIGHT SPOT: With subdued prospects elsewhere, the retail sector will be a bright spot for the region. Retailers will continue to make their foray particularly in growth markets in the near term. China, especially, has been the engine for growth for a number of luxury goods makers. Though signs have emerged of demand growth easing along with a weakening economy, rising affluence in the region is likely to sustain a future pick-up.
Additionally, the liberalization efforts in India and South Korea are set to transform the retail landscape, potentially accelerating international retailers’ entry strategy in those countries within the next 12 to 24 months. Such favorable demographic and economic trends, combined with accommodative policy and regulatory changes, should provide a strong platform for growth and absorption of retail developments across the region, though some cities (particularly in China) with teeming pipelines are at risk of oversupply.
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ECONOMIC PULSE FORECAST 2013
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Property sectors in most markets will continue to witness gradual increases
in rents, occupancies and asset values against a backdrop of sound economic fundamentals.
23
A Cushman & Wakefield Research Publication
GLOBAL PULSE | THE AMERICAS | EMEA | ASIA PACIFIC
Asia Pacific 2013 Economic Forecasts 3-mo. interest rate 10-year bond Yield Value Trend Value Trend
GDP % PA 2012 2013
Inflation % PA 2012 2013
Comments
Australia
3.3
3.1
3.6
2.5
1.4
2.4
After a surge in 2012, the economy is set to moderate as China’s slowdown bites into its mining/energy sector, an important growth pillar. The Reserve Bank of Australia is likely to counter the impact of slowing exports on income and consumption.
China
4.1
3.4
7.6
7.4
2.7
2.4
Two rounds of policy easing has prompted some recovery in property prices, which will support its 7% growth target. However, the weak European economy continues to hurt exports. Any structural reform or new policy is likely to occur after the 18th National Party Congress.
Hong Kong
0.5
1.0
1.8
1.0
3.9
2.9
The economy remains exposed to the deleveraging in Europe and a slowing of the Chinese economy. The massive accumulation of assets on the SAR’s balance sheet should provide some buffer.
India
8.6
8.3
5.8
7.0
7.1
5.7
The government faces a policy dilemma with persistent price pressures and a slowing industrial sector. The ability of the government to stimulate the economy is also hampered by a fiscal deficit that is 6% of the country’s GDP.
Indonesia
4.9
6.0
6.1
5.6
4.3
4.0
Inflation remains under control, which gives Bank Indonesia room to maneuver should it need to cut interest rates. However, this might not be necessary given the depth of domestic demand and a string of infrastructure investments next year.
Japan
0.3
0.8
1.9
1.1
-0.1
-0.4
Malaysia
3.1
3.6
5.0
4.4
2.0
2.8
With GDP growth galloping to an expected 5% growth in 2012 amid low inflation, the economy is turning in a stellar performance. Domestic demand is likely to be shored up by more populist measures due to an election in 2013.
New Zealand
6.0
3.5
2.2
3.1
1.9
2.4
The strength of the NZ dollar is proving a challenge to manufacturers, but largely still manageable due to the strength of its agricultural exports. Continued growth in India and China will contribute to higher export incomes.
Pakistan
10.2
13.4
4.2
3.3
10.0
9.1
Fundamentally, Pakistan’s economy is characteristic of emerging economies. Its political situation dominates its economy, while inflation, up to double-digit figures, remains a real problem, and a fiscal deficit that is about 7% of GDP.
Philippines
1.3
4.7
5.8
4.7
3.3
4.2
The recent peace accord with rebels, if it holds, could open the door to more investment in the eastern island of Mindanao. Healthy remittances are boosting foreign currency reserves and consumption, which is permitting the government to hold off rate cuts for the moment.
Singapore
0.4
1.5
2.0
2.2
4.2
3.3
The island state escaped a technical recession after a revision to second-quarter numbers pushed GDP growth into positive territory. Authorities surprised most by maintaining status quo on the exchange rate, noting that price stability remains a priority due to the expected inflows of liquidity in the light of the Fed’s quantitative easing program.
South Korea
3.0
3.1
2.4
2.3
2.1
2.6
The Bank of Korea cut its policy rate by 25 bps to 2.75% in October. Economic growth for 2012 was lowered to 2.4% from 3.0%. The government has been cautious with fiscal stimulus, as it is targeting fiscal balance by 2014.
Taiwan
0.9
1.2
0.6
1.0
2.3
2.1
GDP will barely manage 1% growth this year. Without the ability to draw on domestic demand, the health of the Chinese economy is critical to Taiwan, as is global demand for tech products.
Thailand
3.1
3.6
5.9
3.8
3.0
3.4
Recovery from Q4 flooding continued through H2 2012. The minimum wage hike has spurred private consumption to counter weakening export growth. Still, the government took its cue from a benign inflation data to cut its policy rate against a backdrop of heightened external risks.
Vietnam
11.3
10.5
4.8
5.0
10.1
8.0
Tightening measures made last year were reversed in 2012, although its impact is expected to be modest, which is likely to set in late 2012 through 2013. Risks include rising bad debts, high inflation and weak consumer sentiment that could ease domestic demand.
November 2012
(Based on October 2012 data)
The recent political standoff involving the disputed islands of Diaoyu/Senkaku has dented trade relations with the Chinese. The Bank of Japan expanded its asset purchase program by ¥10 trillion to stimulate the economy.
24
ECONOMIC PULSE FORECAST 2013
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A Cushman & Wakefield Research Publication
CONTRIBUTORS
Ken McCarthy
Maria T. Sicola
David Hutchings
Sigrid Zialcita
Chief Economist New York, NY
Executive Managing Director Americas Research San Francisco, CA
Partner Head of the European Research Group London, UK
Managing Director Research Singapore
+1 415 773 3542 maria.sicola@cushwake.com
+44 20 7152 5029 david.hutchings@eur.cushwake.com
+65 6232 0875 sigrid.zialcita@ap.cushwake.com
+1 212 698 2502 ken.mccarthy@cushwake.com
Cushman & Wakefield is the world’s largest privately‐held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 253 offices in 60 countries and more than 14,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.
© 2012 Cushman & Wakefield, Inc. All rights reserved.
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