European Economic & Investment Outlook 2024

THE TIDE IS TURNING

ECONOMIC FORECAST

KEY TRENDS TO HELP NAVIGATE THE REAL ESTATE MARKET IN 2024

TIME TO LIFT THE ANCHOR

Euro area GDP grew by 0.1% in Q1 and 0.2% in Q2 Q/Q of this year, with employment growth of 0.5% and 0.1% (Q/Q), respectively, during the same periods. Nevertheless, the effects of the restrictive monetary policy are now becoming more apparent, as several leading indicators are showing signs of deterioration. Early estimates reveal euro area GDP fell by 0.1% Q/Q in Q3, while employment posted a 0.3% Q/Q growth. In October, the composite Purchasing Managers Index (PMI) for the euro area dropped to its lowest point since the onset of the pandemic at 46.5, following a period of stabilisation in September. Both the manufacturing and services sectors’ PMIs declined. The Q3 GDP figures, however, did not align closely with the severity suggested by the PMI surveys. This supports our baseline view of broad stagnation across the euro area in the second half of this year. Survey data from the UK point to a slightly less favourable performance. Consequently, we anticipate the UK economy to remain stagnant until the first half of 2024, followed by a slow paced recovery. There is of course variation across countries. The German economy, which was once Europe’s driver of growth, now has the potential to tip the rest of the euro area economy into recession. Weak economic growth will persist in Germany. The German economy has been underperforming since the end of 2022, falling into a technical recession. In Q2 2023, the economy barely exited a recession with zero growth.

The European economy has been resilient despite the European Central Bank (ECB) raising rates to historic levels. The labour market has held up, and to date, a recession has been avoided. "

4 | ECONOMIC OUTLOOK 2024

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 5

GROWTH FORECASTS

IS SOUTHERN EUROPE THE NEW HELM OF GROWTH?

Despite the economy demonstrating notable resilience, there has been a widespread downgrade in growth forecasts, especially for 2023 and 2024. Economic expansion has slowed, as the economy deals with the repercussions of elevated interest rates, the Russian-Ukraine conflict, and additional geopolitical tensions in the Middle East.

We expect euro area real annual GDP growth of 0.5% in 2023, followed by 0.9% in 2024. The UK economy will grow by 0.4% in 2023, followed by 0.3% annually in 2024.

A surge in tourism and services has resulted in countries heavily reliant on these sectors contributing more to the region's overall growth. Thanks to the favourable exchange rate US travellers¹ have been flocking to Europe. This will assist in sustaining the momentum of Europe's tourism recovery, even in the face of economic challenges. As a result, Portugal, Spain, France, and Italy are expected to be the largest contributors to growth in 2023, growing annually by 2.2%, 1.2%, 0.9%, and 0.8%, respectively. This was not the historical norm. The industrial composition of the euro area was less favourable for Southern Europe. The slower rebound in the services sector since the global financial crisis, coupled with austerity measures, resulted in what is now characterised as a 'lost decade' for the region. It's worth mentioning that in addition to the expansion of the services sectors, the conclusion of austerity programs and the improvements in public finances are expected to contribute to the growth of Southern European economies. ¹ Wall Street Journal: American Travelers Are Shunning the U.S. for Europe

"

EURO AREA GDP GROWTH FORECASTS (% Y/Y)

UK GDP GROWTH FORECASTS (% Y/Y)

A surge in tourism and services has resulted in countries heavily reliant on these sectors contributing more to the regions overall growth.

EUROZONE GROWTH FORECASTS HAVE BEEN CONTINUOUSLY DOWNGRADED THIS YEAR

UK GROWTH FORECASTS HAVE BEEN CONTINUOUSLY UPGRADED THIS YEAR

1.2

0.4

1.0

0.2

0.8

0.0

0.6

-0.2

0.4

-0.4

0.2

MAR 23

APR 23

MAY 23

JUN 23

JUL 23

AUG 23

SEP 23

OCT 23

0.0

-0.6

2023

2023

LARGEST DOWNGRADES FOR 2024 OUTLOOK

1.2

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

2024

2024

Source: Consensus Economic

6 | ECONOMIC OUTLOOK 2024

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 7

TURNING THE CORNER

UNLOCKING THE SOURCES OF GROWTH

CONSUMER CONFIDENCE NEEDS TO IMPROVE TO SET SAILS FOR RECOVERY In September 2022 consumer confidence reached its all-time low just as inflation was reaching its peak of 10.6% the following month. Since then, as inflation has slowly subsided, there has been a modest improvement in consumer confidence, underscoring the substantial impact of inflation on consumer sentiment. Despite the support from easing inflation and robust wage growth, the boost in consumer confidence has not yet translated into retail sales growth. Recent data indicates that retail sales in the euro area declined more than anticipated in October, with a year-on-year decrease of 1.2%. While consumer confidence is expected to decline before seeing improvement in the coming quarters, primarily due to a rise in unemployment and the full impact of increasing interest rates, its pivotal role in economic recovery remains evident. The upswing in consumer spending, fuelled by confidence, contributes significantly to sustaining overall economic growth.

PERPETUAL STABILITY

The ECB and the Bank of England (BoE) will maintain their current interest rate levels until they are confident that the decline in inflation is enduring. As interest rate increases are now in the past, the attention shifts to the duration of tight monetary policy. Headline inflation in the euro area has made significant progress since its peak of 10.6% in October 2022, reaching 4.3% in September 2023 and early estimates showing 2.9% in October with core inflation falling from 4.5% to 4.2%. UK inflation fell from 6.7% to 4.6% Y/Y in October, the lowest level since October 2021. UK Core inflation also experienced a drop from 6.1% to 5.7% Y/Y. The decrease in inflation can be primarily attributed to decreasing energy prices and base effects. However, in more recent developments, diminishing

supply disruptions and falling commodity prices have begun to ease price increases. Hence, this indicates that disinflationary pressures have become more widespread, and it's probable that we will observe a further decline in inflation in the months ahead. While inflation patterns are generally consistent among the euro area economies, there are variations within the actual inflation rates. These divergences are a result of differences in the proportions of food and energy components in inflation baskets, as well as disparities in labour market conditions. Nevertheless, the majority of countries in the euro area are expected to witness a decline in inflation, with inflation rates moving closer to central banks’ targets in 2024. Therefore, we adhere to the belief that central banks will shift their stance in Q3 2024.

The primary catalyst for growth in 2024 will shift to real income growth and, consequently, private consumption. As anticipated in our prior projections, growth is expected to maintain a notably modest pace. The most significant determinant of growth prospects remains inflation. While wages have struggled to keep up with inflation, they are accelerating and are expected to maintain a healthy upward trajectory over the next twelve months. As an example, real wages in the UK became positive in June 2023, marking the first instance of positive real wages since October 2021. This convergence of declining inflation and ascending wages is poised to boost consumers' purchasing power well into 2024. Private consumption is key for economic growth as it accounts for around 60% of GDP in the euro area. Nonetheless, the weakness in exports and investment will restrict any meaningful uplift in broader economic growth.

INFLATION COMPONENTS (PERCENTAGE CHANGE Y/Y)

20

10

0

GERMANY

ITALY

POLAND

-10

EURO AREA

-20

IRELAND

HUNGARY

PORTUGAL

FRANCE

-30

CZECH REPUBLIC

FINLAND

SPAIN

-40

SWEDEN

NETHERLANDS

DENMARK

-50

NORWAY

ENERGY

SERVICES

FOOD

ALL-ITEMS

Source: Eurostat Source: Eurostat (Sept 2023)

8 | ECONOMIC OUTLOOK 2024

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 9

DOWNSIDE TO RISK INFLATION

WAGE GROWTH

FISCAL POLICY

in a decrease in firms' profit margins. As such this could prompt firms to explore cost-cutting measures, such as reducing their workforce. At present, wage growth is at 4.4% in the euro area (Q2 2023) and 8.5% in the UK (Q3 2023). To maintain inflation within the desired range of 2%, we require wage growth to be around 3%. While there is currently no evidence of a wage price spiral across the continent, there are lingering risks of its emergence, and central banks are vigilant about this possibility. It will be crucial to observe whether wage growth moderates in the coming quarters, as the absence of such moderation could pose risks for a shift towards tighter policy or an enduring higher-for-longer stance. The UK stands out as having a higher risk in this regard compared to the broader euro area, and a few specific countries (Czech Republic, Spain, and the Netherlands) also exhibit uncomfortably high wage pressures.

A key concern for central banks is the potential emergence of a wage-price spiral, which could result in sustained higher inflation and risk de anchoring inflation expectations. The probability of a wage-price spiral taking place hinges on specific macroeconomic circumstances. Typically, when labour demand is greater than the supply of labour, it increases workers' negotiation leverage. Due to the retrospective nature of wage agreements, wage growth is barely keeping pace with past inflation. In the euro area, wages are more responsive to historical inflation levels instead of labour market slack.² Since the pandemic, the disparities between demand and supply have pushed firms to increase prices, which has led to an expansion of profit margins. Looking ahead, as demand moderates, firms will find it more difficult to pass along increased costs, including higher labour costs, to consumers. Thus, the expectation is for firms to pare down their profit margins, reinforcing disinflationary dynamics. Indeed, there is a potential risk of a sustained decline in demand, which could result

Fiscal policy is another tool that can help (or harm) in the fight against inflation. Currently, fiscal policy is exerting opposing pressures, prompting numerous ECB officials to express their apprehensions that fiscal measures are ‘out of tune’ and may need to be scaled back to avoid potential medium-term inflationary pressures. Under the European Commission's updated economic regulations², member states with a deficit exceeding 3% of GDP are now mandated to reduce their budget deficit by a minimum of 0.5% of GDP per year.

France, Belgium, Hungary, Italy, and the UK have the highest budget deficits (ranging from 2-4 times the acceptable deficit). France, which has lagged behind other EU member states in deficit reduction, declared additional public spending reductions (€1 billion on top of the existing €16 billion). This move was attributed to mounting pressure on government debt caused by increasing bond yields. ² Commission proposes new economic governance rules fit for the future

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 11

10 | ECONOMIC OUTLOOK 2024

LOOKING AHEAD

TIME TO LIFT THE ANCHOR IS NEARING

LABOUR MARKET YET TO SEE IMPACT

In summary, bolstering productivity growth relies heavily on effective fiscal and structural policies. Additionally, monetary policy can contribute to stimulating demand and investment. An accommodative monetary approach creates favourable financing conditions, enhancing profitability and improving productivity. With the expectation that central banks will initiate interest rate cuts in Q3 2024, this move is expected to relieve some constraints (anchor) on low economic growth, thus fostering the potential for stronger economic growth. In other words, as we head into 2024 H2, we expect the anchors restraining the European economy to start to lift and for a new growth cycle – albeit disciplined and moderated—to unfold, creating new tailwinds for commercial real estate. ³ The employment expectations indicator is a composite indicator that summarises managers’ employment plans across sectors (industry, services, retail trade, construction). ⁴ ONS: Alternative measures of underutilisation in the UK labour market

In September 2023, the unemployment rate in the euro area increased nominally to 6.5% from the previous month's 6.4%. This, however, still marks a decline from the 6.7% rate recorded at the beginning of the year. It's important to note that unemployment is a lagging indicator, hence despite this decrease, the recent robustness of the labour market does not yet fully reflect the effects of changes in interest rates on economic activity. The European Commission’s Employment Expectations Indicator (EEI)³ in October 2023 fell slightly in the euro area as weaker job growth expectations in the manufacturing and retail sectors were offset by improvement within the services and construction sectors. We anticipate an increase in unemployment over time, but this increase is projected to be moderate compared to historical patterns. Our projection anticipates a rise in the euro area's unemployment rate to 7% in 2024, far below the peak of 12% recorded in 2013. In the UK, the unemployment rate in July increased slightly to 4.3%, up from the low of 3.6% recorded a year before. It's important to mention that the Office of National Statistics has pointed out data-related concerns regarding labour force survey estimations, as response rates have significantly declined in recent years. This could potentially result in an underestimation⁴ of the actual unemployment level.

Employment plays a pivotal role in fuelling economic growth, both nominally as more people and more jobs lift growth, but also through its productivity. Given the demographic constraints that Europe faces, which limit labour force growth, enhancing productivity is key to lifting economic growth rates. Productivity increases also lessen the potential for wage increases to unmoor inflation longer term. Labour productivity growth in the euro area has been on a downward trend over several years. The average annual growth in labour productivity, measured as real GDP per hour worked, has consistently decreased from approximately 7% in the 1960s to around 1% in the present decade. Part of the recent decline in productivity may be attributed to scarring effects stemming from the Global Financial Crisis (GFC). The "productivity puzzle" has sparked a prolonged debate, with extensive research⁵ suggesting that technological innovations are now less revolutionary than those in the past and therefore have been less able to lift productivity. However, it is also true that we have yet to witness the full impacts of recent technological advancements on productivity.

⁵ ECB Economic Bulletin: Key factors behind productivity trends in euro area countries

12 | ECONOMIC OUTLOOK 2024

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 13

Guilherme Neves Senior Research Analysist guilherme.neves@eur.cushwake.com

Rebecca Rockey Deputy Chief Economist, Global Head of Research rebecca.rockey@cushwake.com

Sukhdeep Dhillon Head of EMEA Forecasting Research sukhdeep.dhillon@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.