_The key risks facing the global economy and the property market in 2018
By the standards of recent years, the risks currently facing the economy and property investors feel relatively moderate. However, this should not lull anyone into a false sense of security.
Risks remain, and while some grab headlines others keep a lower profile. Here is our selection of the key risks we believe investors should be monitoring this year, scored on a scale of one to five for both impact and likelihood, with five being highest in both cases.
Interest rates
Impact 2.0
Likelihood 4.5
Leading economies such as the US, Canada and the UK have already begun raising their policy interest rates, while debate is ongoing over when the euro zone will end its quantitative easing programme. Bond yields for advanced nations are trending higher in anticipation of a higher rate environment – in early May, the Canadian ten-year bond yield reached 2.4%, up from 1.5% a year earlier.
Few would dispute that the era of ultra-low interest rates is coming to an end. However, central banks have indicated that they intend to raise rates gradually, not abruptly. Also, some commentators say that the Federal Reserve and the Bank of England are guiding hawkish but acting dovish, thus using expectations to deter excessive borrowing.
Moreover, across global real estate markets, property yields are offering a significant spread over government bonds, which should absorb some of the impact of future rate increases.
Disruptors are disrupted
Impact: 2.5
Likelihood: 3.5
The US technology sector likes to talk about disruption; however, there are signs that they may be about to be on the receiving end. China is seeing major cities pivoting from manufacturing to hi-tech, while its people have embraced digital apps. Up until now, US tech firms have led the digital revolution, but Chinese firms are now arriving in the West.
Silicon Valley’s giants face this new wave of overseas competition just as public criticism is growing on issues like privacy and tax. In the long term, this pressure on the tech establishment will be healthy, as competition leads to innovation.
However, in 2018/19 we could see US tech firms, which in recent years have been a major source of global demand for offices and warehouses, reviewing their operations. Time will tell whether new demand from young Chinese tech firms arriving in the West will outweigh any cuts from the US firms.
Trade barriers
Impact: 4.0
Likelihood: 2.0
The threat of protectionism is on the rise in the global economy, which could mean higher costs for businesses, reduced cross-border investment, and exchange rate volatility. Over 30 countries who currently trade with the UK via EU free trade agreements will have to agree interim arrangements as a result of Brexit.
This would be overshadowed by the disruption to the UK and the EU were there to be a hard Brexit. The US government’s recent tariffs on Chinese goods have, unsurprisingly, prompted retaliation.
Progress has been made towards a transition period for UK/EU trade after Brexit. This may suggest there are signs of compromise emerging, although the situation remains highly fluid and politically charged.
Labour shortages
Impact: 3.0
Likelihood: 4.0
In the aftermath of the Brexit vote, there was a widespread expectation that the UK would see mass job losses. In fact, the unemployment rate has fallen to a 43- year low of 4.2% since the referendum, and there are concerns that Brexit will lead to labour shortages across the skill levels.
In other major economies, companies face similar problems recruiting staff. At the time of writing, the unemployment rate is 4.1% in the US, 3.9% in China, 3.5% in Germany and 2.5% in Japan.
The risk for the global economy is that firms will struggle to recruit, which could act as a brake on growth. We see firms responding to labour shortages with greater automation, although in the short term there could be upside for property as firms seek better-quality and well-located offices to increase staff retention.