The ‘long haul’ to recovery

The ‘long haul’ to recovery Global Economic and Real Estate Outlook Dr Richard Barkham MRICSNAREIM Executive Officers Meeting October 2012

Forces acting on the global economy 1 America resurgent?

The labour market is slowly improving Unemployment rate, percent Source: IHS Global Insight

Broad Money growth is quite strong Percent change, year-on-year Source: IHS Global Insight

Real effective exchange rates are helping exports Trade weighted index Source: IHS Global Insight

A manufacturing revival is underway Index of output Source: IHS Global Insight

House prices have bottomed S&P/Case-Shiller National U.S. Home Price IndexJanuary 2000 = 100 SourceIHS Global Insight

Housing starts are ticking up Housing starts, 000s Source: IHS Global Insight

Consumption growth remains lacklustre Quarterly percent change, year-on-year Source: IHS Global Insight

Capex is heading south Non-defense capital goods exc. aircraft Source: IHS Global Insight

Whoever is elected has to enact fiscal tightening General government cyclically-adjusted balance as a percent of potential GDP Source: OECD

Verdict • US recovery on track but expect further periods of weakness • The fiscal cliff ‘debate’ has the potential to be highly damaging but will be resolved • The real fiscal squeeze will not go away

Forces acting on the global economy 2 Emerging markets

Emerging markets matter PPPimpact on World GDP growth of 1% increase in National GDP (2011 data)

China drives the emerging markets PPPimpact on World GDP growth of 1% increase in National GDP (2011 data)

China has been slowing for 14 months Grosvenor world economic activity indicator, 0 is trend growth Source: IHS Global Insight, Grosvenor Research, Google

China’s inflation has fallen sharply Percent change, year on year Source: IHS Global Insight

So monetary policy is being eased

China’s secular growth trend is very robust Retail sales in China: percent change, year on year Long term average Source: IHS Global Insight

Driven by the emergence of a huge middle class

The leadership change is key • The reshuffle at the top of the Party will take place at the Party Congress in late 2012 • The new Cabinet will take over at the National People’s Congress in March 2013

Verdict • China continues to slow for the next 2 / 3 quarters • Stimulus boosts growth from Q2 2013 with benefits to the global economy

Forces acting on the global economy 3 The euro zone crisis

Overall euro zone debt levels are sustainable Gross debt to GDP ratio, percent of GDP Source: Oxford Economics, Haver Analytics

The economic crisis destabilised government finances General government fiscal balance as a % of GDP Source: IHS Global Insight

Eurozone financing needs € billion 2012 Q4 to 2015 Total of maturing debt and forecast budget deficit Source : Oxford Economics/Haver Analytics

The ECB’s Long Term Refinancing Operation has been effective Percent Source: IHS Global Insight

It started with a consumption boom Real total consumption, average percentage change 1999 to 2007 Source: IHS Global Insight

Driven by a housing boom Spain house price index, percent change year-on-year Source: TINSA

Covering over a basic lack of competitiveness % change in unit labour cost-based real exchange rate since joining Euro Source: Oxford Economics / Haver Analytics

Austerity is the order of the day Discretionary fiscal tightening, 2011-13 % of GDP, total 2011-13 Source: Oxford Economics

There’s a banking crisis as well ECB lending to ‘peripheral Europe’ , € billion Source: Oxford Economics/Haver Analytics

Even residents are deserting PIGS banks % of year

The bad debt problems is probably understated Spain’s non performing loans - % loans outstanding Source: Oxford Economics/Haver Analytics

Eurozone banks’ exposure to debt crisis US$ billion Source: Oxford Economics

Politics has driven the euro zone into recession Weighted average, percent change, year on year Source: IHS Global Insight

Eurozone verdict • Recession in the peripheral countries – some growth in north due to loose monetary policy – overall very weak • Break up still a very real possibility: • But some progress has been made • Things will change after the German elections in 2013 • Will voters stay on-side whilst reforms work? • Eurozone remains a drag on world growth in 2012 / 2013

Middle classes still believe in the euro Would you like [COUNTRY] to leave the euro and return to [YOUR PREVIOUS CURRENCY]? Source: IFOP/Fiducial, ‘Regards européens sur la crise de la Zone Euro’, June 2012 Base: 4,000

But it is not the middle classes who go rioting

Forces acting on the global economy 4 Monetary policy

Western consumers remain highly geared Household debt to GDP ratios, percent Source: OEF

As are western governments Gross debt to GDP ratio, percent of GDP Gross debt to GDP ratio, percent of GDP Source: Oxford Economics, Haver Analytics

So central banks are printing ever more money Index, Jan 2007 = 100 Source: EcoWin, Bank of England, Bank of Japan, US Federal Reserve

Monetary policy verdict • Deleveraging is still a key economic ‘headwind’ in the OECD • Monetary policy settings are extreme and have had a positive effect, particularly on asset markets • But the policy is a giant economic experiment and no-one knows what the results will be

So where does all this leave us? Summary of forces acting

Global recovery remains on a knife edge Real GDP, quarterly percent change, year-on-year Source: IHS Global Insight

An EZ break up would mean a new global recession

Deflationary conditions persist in the OECD Percent Percent Source: OECD, IHS Global Insight

Overall verdict • Weak growth, de-leveraging, low interest rates – it all sounds a bit like Japan • It is not as bad as Japan, but expect weak growth a poor employment creation for some time: • US to lead growth • Euro zone to be the main source of risk plus a drag on the world economy

Global Real Estate Markets Summary of Return Projections

The ‘long haul’ to recovery