UBS: Macroeconomic overview

UBS wrote that the economy held up better than expected in the first quarter of 2019, while some major central banks have turned dovish. Delayed policy tightening is supportive of real estate and investment activity was weaker across all regions with cap rates levelling off. UBS says occupier and investor markets look more resilient to any shock from the economy than they were prior to the global financial crisis.

There is of course uncertainty over this, notes UBS in its Q2 Real Estate Summary.

“A key question is what policy space exists should a downturn bite. The Fed has raised rates nine times from their low and hence has some room for conventional monetary support in the form of interest rate cuts. However, this may not be enough. Moreover, the European Central Bank (ECB), Bank of England, and Bank of Japan (BoJ) have no room for conventional policy support given their rates remain around zero. Hence any new downturn might require new monetary measures to be introduced, in addition to those brought in after the financial crisis.

“Given the limited room for monetary easing, support might be needed from fiscal policy. However, governments typically tend to move only slowly and fiscal policy takes time to feed through. Moreover, views on the desirability and efficacy of fiscal policy can vary. For example, Donald Trump has embarked on a fiscal stimulus of USD 1.5tn of tax cuts in the US over the next decade, while much of Europe is bound by eurozone budget deficit rules which foster austerity.

“Germany is even more austere and limits its structural deficit to just 0.35% of GDP. However, calls for a greater role for fiscal policy are growing, with the Modern Monetary Theory proposed by some academics arguing for borrowing-financed spending, irrespective of debt levels.”

Following the dip in sentiment at the start of the year central banks turned dovish, wrote UBS. In January, the Federal Reserve reined in expectations for several rate rises this year and said it would be “patient”.

UBS says it is now unclear as to whether the next move in US rates will be up or down, with core personal consumption deflator inflation subdued at 1.6% in March and the unemployment rate at a 50-year low of 3.6% in April.

Other major central banks have dropped into line behind the Fed, with the ECB announcing it will restart its targeted longer-term refinancing operations bank lending scheme in September and that it intends to keep rates on hold, while the BoJ has also said it will maintain easy policy.

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