Julie Whelan:
Let's start with the state of the economy. To discuss how the rest of 2023 will unfold, I'm joined by our leader who always has his pulse on the market, Richard Barkham, Head of Global Research and Global Chief Economist. Welcome, Richard.
Richard Barkham:
Hi, Julie.
Julie Whelan:
Richard, at the start of the year, your exact words for the U.S. economy were, “We expect a recession in 2023, but we are not overly pessimistic.” Do you still agree with that statement? And what are your views globally on that?
Richard Barkham:
I would still agree with that statement, Julie, and I would say the situation in the global economy has improved over the last six months, particularly in the United States and Asia. But I would also caution that we're still at peak interest rates and we'll be there for the next six months. So the downside or a nasty downside, or the possibility of that has not fully receded. Let's remember we started the year with three pretty intense headwinds on the global economy. China, the world's second-largest economy was in lockdown. Europe was faced, faced a winter with a tenfold increase in energy prices and, led by the Federal Reserve in the United States, central banks around the world were raising interest rates to deal with inflation, which had substantially surprised on the upside. So why do I say things have improved? Well, China, obviously out of lockdown and growing, energy prices fallen precipitously in Europe, to long-term levels. So nothing out of the ordinary there. And I think we're making substantial progress on headline inflation, and there is increasing indication that core inflation is turning down. So, there's much talk of the U.S. achieving a soft landing. That's not quite in our scenario, but the path to a soft landing in the United States is certainly wider than it was.
Julie Whelan:
Well, I read in early July that the G-10 collectively had raised interest rates a total of 950 basis points across 28 rate hikes. So glad to hear that core inflation is coming down because they have certainly been working to do that. So you talk about a soft landing, but you also alluded to the fact that our house view is different. It still calls for a mild recession, so not entirely avoiding a recession altogether. Why is that? Why are we being cautious?
Richard Barkham:
Well, in short, and I've more or less said it already, we are not yet through the rate cycle. And if I had to unpack that, I would say that first and foremost, we have not seen these levels of interest rates for 22 years, and the U.S. and the global economy has changed a lot over that time. In particular, there's more debt. So there is still a degree of uncertainty about the timing and extent of the impact of interest rates, and we do think that there will be more negative impacts on growth to come, despite the fact that we've seen resilience in the U.S. economy, quite remarkable resilience. I think secondly, as we pass through the, what we economists called the transitory phase of inflation or pandemic legacy inflation, we're still left quite surprisingly with uber-tight labor markets both in the United States, in the UK and Europe, and in Asia.
Richard Barkham:
And just to take a case in point in the United States, for instance, wage growth is stable at 4.4%. It doesn't sound very high, but it's not really consistent with 2% inflation. So I think we need to see more rebalancing with lower labor demand and perhaps increased labor supply. In other words, a little bit more labor weakening, labor market weakening, higher unemployment, and I think we might need some periods of negative economic growth in order to achieve that. And my final point would be that on this issue of recession, the headwinds that I mentioned to start with haven't completely died away. Europe is already had a mild recession, growth returned in Q2, but it may slip back into recession. The German economy, which is a driver of Europe is quite weak right now.
Richard Barkham:
And of course there are risks in Asia as well around China growth, from its very sluggish housing market in tier two and tier three cities. But having said all of that and cautioned that we might still experience a mild recession, I would say, you know, the, the operative word there is mild. It is not a very extended period of negative growth, more like a period of standing still, that we have in our house view, albeit it's not quite a soft landing.
Julie Whelan:
So standing still that seems to me like treading water or when do you think we'll stop and we'll actually be on a solid upward growth track again?
Richard Barkham:
You can never precisely date these things, but we think that the U.S. will experience mild negative growth in Q4 of 2023, and then Q1of 2024. So this weak patch will stretch into 2024. And the U.S. is a major driver of the global economy, so that will exert a slowdown on all of the advanced economies and the emerging markets as well, albeit with different timings. However, we do think, and we're already beginning to see it during Q1, the conditions for getting down to 2% inflation will come into place, and that will allow central banks led by the Fed to start to cut growth. And that will bring about the conditions where growth can revive in Q2, making 2024 a weak, but positive, year for the global economy.
Julie Whelan:
Okay. So this baseline around our economic outlook is extremely helpful, but we're here to talk about implications for commercial real estate and we have many colleagues in the wings waiting to help us do that. But to start us off, what is your high-level view of implications for our sector?
Richard Barkham:
Well, let's talk about capital markets. Capital markets usually leads the economy by about six months, and indeed we've already seen some improvement in capital market sentiment, particularly around the soft-landing narrative in the United States. But I think we'll need another quarter of good inflation results for that positive sentiment to turn into action and for, with a lag, I think that means that transactions will begin to tick up in Q1 of 2024. I think we also probably a little bit of further price adjustment in the United States and, and other markets for that to happen. Now, leasing usually lags the economy by six months, but I think the economy is not quite behaving as it used to do. And we have certain sectors, for instance, retail, for instance, industrial, for instance, data centers, they've got long-term tailwinds that I think may accelerate the normal process. So, they might start to pick up at the same time as capital markets transactions do,, Q4 of this year, Q1 of 2024.
Julie Whelan:
Okay. Well, something to watch out for. And before we end this section, what are you most closely watching that you think our listeners should keep an eye on also?
Richard Barkham:
Well, big picture, Julie, the economy is still transitioning from the pandemic. During the pandemic there was extensive spending on goods. We are now transitioning to much more spending on the services sector, and that explains why we've got a degree of service sector inflation still running in the economy. It also explains why consumer economies like the U.S. and the U.K. are doing well, and export economies like Germany and China have run a little bit into headwinds. So that's the big picture. I'm also watching good growth in Japan. It's an export economy, but it's doing well because of domestic consumption, and it's been a long time since I've been able to say that, so that's really an interesting story. But most of all, I think I'm keeping a close eye on wage and salary growth, both in the U.S. and Europe because that's what central banks themselves will be watching that feeds through into core inflation. And if that eases quicker than we expect, then I think this road to a soft landing might open up further. We're not there yet, but that's what I'm watching.
Julie Whelan:
Well, thank you Richard. I often say that although I'm not an economist, I have learned enough from you to be dangerous. So it's messages you deliver like this that help all of us navigate this sector with more confidence. So thank you for your comments.