Global expansion on track
The global economic expansion continues on track, despite the shocks of the triple disasters in Japan and the political turmoil in the Middle East in Q1. Most forecasters are now marginally less optimistic in their outlook, although IMF forecasts for global economic growth in 2011 have remained unchanged at 4.4%. While there are no shortages of headwinds, we believe that the balance of risk continues to be on the upside as global business confidence improves.
The US recovery is picking up steam. Employment appears to have entered a period of consistently stronger growth, manufacturing output is expanding robustly and business confidence is up. Corporate profits continue to be a core source of strength for the US economy, and corporations are spending more on new technology and new hires, which should reinforce employment growth and bolster consumer confidence. Importantly, the credit markets are loosening and bank credit is increasingly available to small businesses. However, higher oil prices are subduing consumer spending power and the debt overhang is still casting its shadow on the potential vigour of US economic expansion. Growth projections for GDP in 2011 are mostly in the range of 2.8% to 3.3%.
Europe’s broad-based recovery is set to consolidate this year, with the European Union forecast to expand by around 1.7% in 2011, similar to last year’s performance. The economies of Europe’s north and east will fare best, notably Sweden, Poland and oil-exporting Russia. Germany is set to remain the growth leader in Western Europe, albeit with growth slowing to 3.0% year-on-year. With consumer spending below trend and domestic demand under pressure from fiscal consolidation, Europe’s other major economies, the UK, France and Italy, will expand less rapidly.
Asia Pacific’s economic outperformance is expected to continue during 2011, although growth is likely to moderate due to a slowdown in external demand, and both fiscal and monetary tightening. Growth of 5.0% is projected in the region, slightly below the 2003-2007 average. The overall impacts of Japan’s earthquake on regional growth this year (ex-Japan) are likely to be relatively minor. Export growth remains strong, and disruption to the region’s trade flows due to the disaster will likely be temporary.
Global Real Estate Health Monitor
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General Trend: Worsening Neutral Improving
Note: Chinese GDP YOY
Data as at 29 April 2011
Two-speed global economy
The two-speed economic recovery that began in 2009 still describes the 2011 outlook, with emerging markets growing three times faster than developed markets – this year the emerging world is likely to grow by about 6.5%, compared with around 2.0-2.5% for the developed economies. Nevertheless, the major emerging markets are expected to slow, albeit still at healthy levels and could yet surprise on the upside. China is expected to lead with growth of 9.3% in 2011, a slight slowdown from the 10.3% of 2010, following the government’s ongoing policy measures to prevent overheating. India is forecast to see the second highest economic growth rate at around 8.3%, as its economy expands on the back of strong exports and investment spending. Russia is benefitting from higher oil prices and, like Brazil, is anticipating economic growth of around 4.4% in 2011.
As concerns about economic recovery have eased, inflationary worries have moved centre stage, particularly in the emerging markets. Inflationary pressures accelerated further in many Asia Pacific countries during Q1. In March, China’s CPI inflation rate was 5.4%, while in India wholesale price inflation increased to 9.0%, both well above their central banks’ targets. Price rises have also exceeded expectations across Europe over recent months, chiefly as a result of buoyant commodity prices and rising indirect taxes. The anxiety for policymakers is that what may currently be one-off price effects could feed into wages and costs over the medium term, and central banks will therefore have to respond more aggressively.
Normalisation of interest rates
Inflation is an increasing influence on policy, and many governments, particularly in Asia Pacific, are in tightening mode. China has been aggressive in chasing asset price inflation and, since the beginning of Q4 2010, has raised interest rates (by 100 bps), banks’ reserve requirement ratio (by 350 bps) and the minimum down payments required to buy second homes; it has also announced the introduction of a property tax on a trial basis in a few cities. Hong Kong and Singapore have likewise brought in several measures to cool their residential markets.
After three years of unprecedentedly low interest rates in the Eurozone, the European Central Bank (ECB) raised its policy rate by 25 basis points to 1.25% in early April. Our baseline forecast is for another 25-50 basis points increase this year, although hawkish comments from ECB members suggest the risk is for a faster pace. Meanwhile, the US Federal Reserve Bank (the Fed) has made it clear that while quantitative easing will end in June, interest rates will not rise soon. Economists have warned that any prolonged differences in strategy between the ECB and the Fed could have a destabilising impact on global economic prospects.
With interest rates still well below long-term averages, further rate increases from most central banks are inevitable. While an aggressive tightening cycle would be expected to dampen the pace of real estate recovery, the gradual normalisation of rates is widely anticipated and is likely to have only a modest impact.