Think European cities Q2 2019 outlook
The long-awaited upturn in European economic sentiment in early 2018 unfortunately proved short-lived. Whilst political risks are never far away on the continent, it has been geo-political events in the United States (U.S.), China and the United Kingdom (U.K.), which combined have engineered a European slow-down.
Financial markets have recovered from the rout witnessed in the final quarter of 2018, unaided by the ‘gilet jaunes’ protests in France and automotive-led economic weakness in Germany. However the realisation that Italy has dipped back into recession has cemented what could prove to be a rather challenging start to 2019. Despite this, our five-year output forecast of c.1.4% is unchanged, buoyed by the possibility of stronger wages and low inflation supporting household spending, even though there are risks attached to exports and investment.
Eurozone inflation, which retreated to 1.2% in December 2018 as a result of lower oil prices, is unlikely to trend materially higher in 2019. As such, the European Central Bank are unlikely to waver from their cautious approach to monetary policy. The marked retreat in U.S. 10-year treasuries, from 3.3% to 2.7% during Q4 2018, and an accompanying more dovish tone, echoes this mantra. Meanwhile in the U.K., the direction of the Bank of England will depend on any final agreement reached (or not) with the European Union (EU). Uncertainty is the enemy of business, and the lack of clarity so close to the scheduled date that the U.K. is to leave the EU is, unsurprisingly, undermining U.K., growth projections and increasing financial market volatility.
It is still our assumption that some agreement is penned with the EU. However, our revised lower long-term economic trend rates are also a reflection of changing demographic and productivity trends indicative across many developed economies. These are shaping future long-term borrowing rates and, consequently, capital flows across asset classes. A demand-led shock, amplified by technological or structural change, is the biggest concern for real estate investors as the traditional causes of corrections, namely excessive debt or a supply glut, are currently not present.