Global economy - downside risks have increased

We are becoming more concerned about global growth. Although 2016 is expected to be another positive year for the global economy downside risks remain uncomfortably large.

10th February 2016

Will Sovereign Wealth Funds sell out of real estate in 2016?

Sovereign Wealth Funds have become important investors in the global real estate markets. We believe sustained lower oil prices have the potential to trigger a sell-off in their real estate holdings.
Graham Parry, Group Research Director, Grosvenor Group, shares his insights. Click here to read more.

Positive news for foreign investors in US real estate

The new US budget bill makes several long-sought revisions to the Foreign Investment in Real Property Tax Act (FIRPTA). The reforms will have a positive impact on foreign investors in US real estate.
Eileen Marrinan, Director of Research, Grosvenor Americas, explains.  Click here to read more.

The global economy faces heightened levels of uncertainty.  Although we expect 2016 to be another moderate year for growth in the global economy, with world GDP growth averaging around 3% p.a. (Chart), the list of potential downside risks remains uncomfortably long. Key risks include: a hard landing in China; a financial crisis in emerging markets, global banking stresses, overcapacity in the oil market, rising tensions in the Middle East, and the UK vote on EU membership.  

Data out of the US for the past few months have been weak, with the main bright spot being the labour market.  Overall we think a material slowdown in the US economy is unlikely this year.  Services PMI continues to signal growth and a tighter labour market should feed through into high real wages this year.  We also expect the Fed to hold or even lower rates if it looks like the US economy is losing steam.

As in the US, the UK labour market looks healthy and overall economic activity is positive but lukewarm.  Preliminary estimates for 2015 show 2.2% p.a. real GDP growth.

The UK continues to run a current account deficit of 3.7% of GDP, which is relatively large among advanced economies.  We see Brexit as the largest near-term risk for the UK.  A vote to leave the EU is likely to result in significant volatility over the medium term.  Our base case is for Britain to vote to remain in the EU, by a thin margin.

The Eurozone is continuing to enjoy a cyclical recovery supported by highly accommodative monetary policy.  The ECB has moved its policy rate further into negative territory and extended its QE programme to March 2017.   ECB President Mario Draghi has signalled a willingness to ease even further without a material pick-up in deflation.  This augurs well for economic growth, but will continue to pressurise European banking margins and profitability.

In China, we anticipate GDP growth of around 6.5%, with risks to the downside.  Overinvestment, a highly leveraged private sector, and policy mis-steps are all potential destabilisers.  Still, our base case is not for a Chinese hard landing.  There is still room for the government to take private debts onto its own balance sheet.  The weaker RMB should support net exports and the PBOC has signalled a willingness to ease further if necessary.  None of these are long-term solutions, but should act as an economic safety net over the coming year.

While the macroeconomy appears steady, we are moving to the late stage of the property cycle in key global cities.  Investors should be wary of chasing yields lower in 2016, as these may end up being the deals most regretted when the market does eventually turn.

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