While an inverted yield curve is historically seen as a harbinger of a recession, UBS argues that this time may be different.
Gunnar Herm, Head of Research & Strategy Europe, UBS-AM Real Estate & Private Markets, explains:
“The factors which are contributing to the concerns of the pace of economic growth in the eurozone are undoubtedly significant for real estate markets. GDP grew by 0.7%, but in 1H19 slowed to just 0.2% quarter-on-quarter (QoQ) in 2Q19. Survey data suggests a pick-up in 3Q is highly unlikely.
“By far the biggest concern in the eurozone is the continued weakness from the manufacturing sector, with gross value added (GVA) forecast to grow by just 0.2% in 2019. The challenges seem to be most apparent in Germany where industrial production suffered its worst quarter in more than six years. This resulted in a contraction in GDP in 2Q, the second in the last four quarters, with risks skewed to the downside if the trade war escalates further.”
But it is not all doom and gloom, says UBS, with the domestic economy and services sector remain in relatively good shape. The eurozone unemployment rate fell to a decade low level of 7.5%, and wage growth is also rising at the fastest pace in a decade which bodes well for consumer spending going forward.
Two weeks ago, the European Central Bank said it would cut its interest rate for deposits by 10 basis points to -0.5% and keep them there or lower until the inflation outlook improved.
The ECB also announced that it would re-start Quantitative Easing, with €20 billion in bonds and other financial assets purchases per month, starting in November. The central bank committed to this policy for “as long as necessary.”
The ‘silver lining’ for real estate markets from the weaker economic environment is with government bond yields tumbling partly as a result, the risk premiums to property, even at exceptionally low yields, continue to look attractive and are likely to support pricing.
“Despite a weakening economic outlook in the eurozone, our all property total return forecast for the region has been upgraded from six months ago. This has been largely driven by the dovish shift in monetary policy from the main central banks which has significantly downgraded the expectations for interest rate rises over our forecast period. This means we are no longer factoring in outward shifts in property yields towards the end of our forecast period as a result of shrinking risk premium.”
Tomorrow, we outline UBS’ adjusted eurozone property forecasts as a result of the downgraded economic outlook.