European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

INTRODUCTION

GDP (INDEX, 2019Q4=100)

In our latest outlook report, we focus our analysis on our base case scenario which we feel is the most probable scenario based on our modeling and read on market conditions. That said, we acknowledge we are making predictions during a period of heightened uncertainty. We assign a 50% chance to our baseline scenario, meaning that we believe there are even odds that the UK and euro area economies could perform better, or worse.

KEY TAKEAWAYS

• Economy: a mild recession in the UK and the euro area will occur in 2023. • Capital Markets: a turning point as higher interest rates percolate through markets. • Office: demand for high-quality office will intensify but will soften for lower grade space. • Logistics: vacancy to remain near record lows despite slight uptick. • Retail: the outward shift in yields across Europe will be relatively contained. • Alternatives: no longer niche, these assets are likely to outperform. Surprise Resilience The latest euro area real GDP figures surprised to the upside in the final quarter of 2022, with quarter-over quarter (QoQ) growth of 0.1%. With this data, the euro area avoids falling into a recession (for now). Country detail reveals that QoQ Germany’s economy declined (-0.2%) as did Italy’s (-0.1%), while Spain and France grew by 0.2% and 0.1% respectively. Ireland’s economy grew by 3.5%, which contributed 0.1 percentage points (pp) to overall euro area growth, without which, the euro area economy would have fallen into a mild recession. We expect downward revisions in the second and third releases. Too much emphasis is being placed on the final quarter numbers to determine whether the euro area will fall into a recession. Whether growth remains flat or is revised down, the underlying truth is that growth for the euro area and the UK has been subdued.

Source: Cushman & Wakefield Research, Eurostat, Moody’s Analytics *Forecasts refer to C&W Baseline Scenario – January 2023

Cushman & Wakefield’s baseline assumes a mild recession in the UK and the euro area. For 2023, real GDP will grow by 0.4% in the euro area and by -0.3% for the UK. But it will be a tail of two halves, with both economy’s contracting H1 and then beginning to recover in H2 as the headwinds fade. The UK - First in, Last Out The UK economy has recorded very little growth since the first quarter of 2022; furthermore, in the fourth quarter the UK economy was still 0.8% below pre-pandemic levels. This is in contrast with the economies of the euro area and the U.S., which are 2.4% and 5.2% above pre-pandemic levels, respectively, as of year-end 2022. The UK will only return to its pre-pandemic output level by third quarter 2024, according to our baseline. There are four main reasons why the UK’s economic growth has lagged its European counterparts, both before the pandemic and through it. Higher energy prices: the UK has experienced relatively higher energy prices, partly because operating costs of energy suppliers are higher. Suppliers therefore have smaller profit margins and are less able to absorb increased costs, such as those associated with fuel, labour and maintenance relative to other markets. Government subsidies are also smaller in the UK. Lastly, the UK does not have a lot of gas storage capacity and is more dependent upon the spot market where there is greater volatility in prices. As result of higher energy prices the UK has experienced higher inflation than the euro area denting consumer spending. Labour shortages: In the UK, there is still an elevated number of people outside of workforce (either unemployed or employed). In economics this

ECONOMY

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