LOCKDOWN CAUSES GLOBAL RECESSION
The economic effects of COVID-19 include staggering job losses, greatly reduced consumer spending and business closures. Though each country has responded with its own unique set of virus control policies, major economies have all instituted an unprecedented level of monetary and fiscal stimulus.
Aggressive measures in some countries, including robust testing, prevented lengthier lockdowns. Many other countries did not take aggressive early actions, resulting in necessary but draconian measures to slow the virus’s spread. This has resulted in a historically deep recession, impacting property market fundamentals across the globe.
Most major economies have begun to lift restrictions, allowing for some economic recovery, but South America is now battling a surge in cases during winter in the Southern Hemisphere. Normal activity will not fully resume until a vaccine is available. Public health officials suggest a vaccine may be available in the second half of 2020 but likely will not be widely distributed until 2021.
FIGURE 1: SHARE OF COVID-19 CASES BY REGION
Source: European Centre for Disease Prevention and Control, July 2020.
ECONOMIC RECOVERY IN LATE 2020
CBRE’s baseline forecast is for a severe contraction in GDP of between 5% and 10% this year across the major developed economies. GDPs of the Euro Area, U.S. and Japan are forecast to contract by 8.1%, 5.1% and 6.0%, respectively. The outlook is mixed in other parts of Asia, with growth in China slowing to 2.3% for the year, India contracting by 5.9% and Korea falling slightly by 0.8%.
As restrictions are substantially lifted, CBRE sees a strong economic recovery taking hold in the second half of 2020 and lasting into 2021. In terms of a shape, think of a wide “V” or what some call a “Nike swoosh.” GDP growth in most large developed economies is expected to surpass 5% in 2021, with the Euro Area, U.S. and Japan growing by 6.4%, 5.0% and 3.0%, respectively. China, India and Korea are expected to rebound with GDP growth of 8.5%, 11.2% and 3.5%, respectively, next year.
There have been some encouraging signs of recovery: Auto and air travel are increasing and customers are returning to those restaurants that have reopened for dining.
Although CBRE is optimistic that a global economic recovery will be underway in the second half of 2020, its momentum in 2021 will depend on further fiscal stimulus and a vaccine for COVID-19.
FIGURE 2: FORECAST GDP GROWTH, 2020 vs. 2021
*Fixed market exchange rates.
Source: CBRE Research, July 2020.
UNPRECEDENTED FISCAL & MONETARY STIMULUS TO CONTINUE
The U.S. and Japan were the most fiscally aggressive developed economies, with crisis spending totaling 15% and 43% of their respective GDPs. China and the largest economies of Europe deployed stimulus packages of around 5% of GDP. Many of these actions were aimed at stabilizing employment, preserving the supply side of the economy and funding public health responses. Nevertheless, the virus remains active and on-going restrictions continue to weigh on economic activity. This will necessitate varying degrees of additional policy support until activity can freely resume and confidence returns.
Central banks in the U.S., Europe, Japan and the U.K. all lowered their short-term interest rates to zero. In addition, central banks have made robust levels of asset purchases and taken other liquidity actions to stabilize financial conditions. Central bank balance sheets across developed economies have grown by between 5% and 21%, with the U.S. Federal Reserve increasing its balance sheet by 13.5%.
Additional stimulus by the world’s largest economies—Europe, the U.S. and China—is forthcoming and will support global economic recovery. EU leaders agreed to a €750 billion (US$850 billion) stimulus package, which is particularly noteworthy because of its united approach to the crisis in Europe. Meanwhile, the European Central Bank (ECB) expanded its asset purchases and maintained low short-term rates.
In the U.S., policymakers have called for additional relief packages in the trillions of dollars, but stronger-than-expected economic data in May and June could temper such proposals. Nevertheless, some amount of additional relief for hard-hit industries and workers is expected. The Federal Reserve has also indicated that it will not increase the federal funds rate beyond its current range of 0 to 0.25% before 2022.
China announced more than $850 billion in new stimulus spending, including for infrastructure, urbanization and other sizeable projects that will help boost growth. China’s central bank also has undertaken various measures to ensure ample market liquidity and credit availability.
PAYING FOR STIMULUS
Government debt levels are sharply increasing as fiscal packages are deployed to ensure recovery. How will governments pay for this?
There is no immediate danger that developed economies will be unable to fund their debt because the surplus of global savings is ideal for low-risk government debt. In addition, central banks are actively buying government debt to keep long-term interest rates down and the economy stimulated. Amid a low-inflation environment, this policy mix works well to facilitate large deficit spending.
Central banks must retain their independence to tighten monetary policy through interest rate increases and balance sheet reductions when appropriate. Although governments cannot rely on quantitative easing (asset purchases) alone, renewed economic growth will generate revenue to service debts. Furthermore, potential tax increases and reduced spending could help reduce overall debt-to-GDP ratios beyond the near term. There is a mild longer-term risk that governments might reduce the real value of their debt by not checking against inflation.
FURTHER FULL-ECONOMY SHUTDOWNS UNLIKELY
Risks to the outlook will remain elevated until effective treatments and ultimately a vaccine for COVID-19 are discovered. Nevertheless, policymakers likely won’t execute large-scale shutdowns of their economies again, partly due to economic and political pressures but also because they have a more robust toolkit to combat the virus. This includes testing infrastructure, adequate contingency planning and necessary levels of personal protective equipment for medical professionals.
It is possible that more dramatic measures may be taken, albeit in a targeted fashion. Selective lockdowns will occur only if hospital capacity becomes an extreme issue.
REAL ESTATE LAGS ECONOMIC RECOVERY
The current global recession is unprecedented in the post-war period. A recovery is already underway, aided by an unprecedented level of fiscal and monetary stimulus, as well as pent-up demand. The recession will depress interest rates for at least two years, which will support capital flows to commercial real estate. Companies likely will wait until the economic recovery appears firm and sustainable before they lease more space, meaning that a recovery for commercial real estate will lag the economic recovery by at least six months.